Royal Dutch Shell Group .com

Houston Chronicle: Shell's strategy led firm into decline, brokers say: "It's a disaster for their reputation..." ( 20 Jan 04


(Bloomberg News Story)

Jan. 20, 2004, 12:32AM


Five years ago, Royal Dutch/Shell Group was the world's largest publicly traded oil company. Today it's third and sliding.


Since 2001, Shell has missed goals it set to boost oil and gas output and failed to build up enough reserves to match the volume pumped from the ground. On Jan. 9, Shell said its proven reserves in 2002 were 20 percent lower than stated earlier, tarnishing the century-old company's image for prudent management.


Its shares have since lost more than 10 percent, and Standard & Poor's said it may cut Shell's AAA long-term credit rating.


"It's a disaster for their reputation," said Ivor Pether, who helps manage the equivalent of $8.4 billion at Royal London Asset Management, including Shell shares.


Royal Dutch/Shell Group's unexpected disclosure has led to calls from some of the company's largest investors for a change in strategy and management, increasing pressure on Philip Watts, Shell's chairman since July 2001.


The difficulty is partly a result of the divergent paths Shell and its competitors took when oil prices dropped to $10 a barrel in 1998, analysts said. While then-smaller rivals Exxon Corp. and British Petroleum Co. expanded by acquisitions and mergers, Shell focused on cutting costs and investment.


Watts, 58, inherited and extended the cost-cutting strategy started by his predecessor, Mark Moody-Stuart. Two months after becoming chairman, Watts lowered Shell's target to boost oil and gas output to 3 percent a year, from 5 percent. Last year, Shell said it would miss 2003's output target.


Watts and other Shell executives weren't available to comment, spokesman Andy Corrigan said.


Shell reduced its proven reserves, a measure of the company's value and growth potential, by 3.9 billion barrels, worth some $120 billion based on the current price for crude oil. The disclosure came as figures showed Shell in 2003 also failed to replace the oil and gas it pumped with new additions to reserves, increasing investor concern about growth at its exploration and production unit, the company's most profitable.


In December 1998, under Moody-Stuart, the company wrote off $4.5 billion in assets from refineries to chemical plants. It targeted savings of $2.5 billion a year by 2001, partly by selling less-profitable operations. Also, Shell eliminated 15,000 jobs from 1997 to 2000 to bring its work force at that time to 95,000.


At the time, Shell executives said large mergers often get bogged down in regulatory reviews that can distract managers and strip the transactions of their envisioned benefits.


Exxon and BP made multibillion-dollar acquisitions, creating companies that rival or exceed Shell in size. Exxon announced its agreement to buy Mobil Corp. for $80 billion in stock and debt in December 1998, leapfrogging Shell as the top oil company.


BP, under Chief Executive Lord Browne, has now surpassed Shell in size on measures such as production and market value.


Watts netted multibillion-dollar accords to secure future supplies. In 2003, he agreed to spend $5 billion on a natural gas plant in Qatar that makes motor fuels. While Qatar holds the world's third-largest gas reserves, the plant will not bring in revenues until 2008 at the earliest.


Also in 2003, Shell and partner Total became the only Western oil companies to secure an agreement with Saudi Arabia to find and supply gas in the kingdom, after five years of talks.


Watts ran Shell's oil production and exploration unit between 1997 and 2001, when some of the recategorized reserves were booked.


He promised "continuity" with his predecessor's policies and pursued Shell's effort to save money.


Shell in 1998 planned to save $2.5 billion a year by the end of 2001. It achieved more than $5 billion by that date.


Shell's biggest challenge now is to restore confidence, investors said. The company plans to present fourth quarter and full-year earnings next month, as well as further details on its review of reserves.

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