The Independent On Sunday (UK): Tarnished Shell seeks to be born again: Tim Webb on the oil giant's attempts to put scandal behind it and give itself a facelift: "Shell directors have spent the last year reading the newspapers about how bad they are," he says. "The last thing they want to read is that they have failed again." (ShellNews.net)

24 October 2004

Shell is expected to outdo its rival, BP, when it announces higher third- quarter earnings this week. In fact, it has already earned more than BP this year, which isn't bad for such a "troubled" company.

It underlines the fact that the Anglo-Dutch company has continued to perform financially despite spending most of the year mired in controversy. This is the same Shell which in the past six months has seen its chairman, exploration chief and finance director leave after a fifth of its proven oil and gas reserves were found to be wrongly booked. And it is the same company whose new chairman, Jeroen van der Veer, vowed last month at its annual strategy meeting: "Much more needs to be done. We are driving Shell to be a different company."

So why is the oil giant - motto, "You can be sure of Shell" - changing and what will the "new Shell" look like?

One of the biggest problems facing Shell is how to replace the oil it is pumping. After it downgraded four billion barrels of "proven" oil and gas reserves to "probable", the company was left with one of the lowest reserve replacement ratios among its peers. Since 1999, excluding reserves from companies it bought, it has averaged less than 100 per cent replacement; last year it was 80 per cent. This means that it is selling oil faster than it can find it. In effect, the company is shrinking. By comparison, BP's ratio has been comfortably over 100 per cent over the last five years.

Peter Hitchens, an analyst from the French stockbroker Cheuvreux, says that the problems date back to the late 1990s when Shell cut exploration spending. "As a result, it could not find enough reserves and could not meet its production targets," he says.

Rather than massaging the figures, as his predecessor had, Mr van der Veer promised "actions and urgency" to solve the reserves problem. Disposals would raise up to $12bn (£6.6bn) by 2006 and capital spending would be boosted to $15bn per year over the next two years from an original budget of $12bn, most of it on exploration and production. This is around four times the amount earmarked five years ago and the same spending level as US oil major Exxon Mobil, which is a third bigger than Shell.

Mr van der Veer also promised the money would be spent differently. Rather than drilling smaller wells in more areas, exploration would concentrate on "big cat" discoveries, he said. In future, it will focus on West Africa, and in particular Nigeria, Russia and the Middle East, as well as on deep well drilling and liquified natural gas. It is selling out of country positions where the deposits are smaller - Thailand, Angola, Sweden and Spain.

Andrew Archer, an analyst at Commerzbank, argues that it is more a case of tidying up rather than a radical departure from the past. "The worry is that it's not going to be a very 'new Shell'. It's much more a case of trying to catch up with its peers. They are trimming and tidying where they can."

Mr van der Veer said that reserve replacement would average at least 100 per cent until 2008, hardly an ambitious goal but if met, much improved on recent performance. Production, he said, would be little more than flat, giving a range of between 3.8 million and four million barrels of oil a day by 2009, after falling next year.

With production this year at a maximum of 3.8 million barrels a day - and the company's recent appalling track record for meeting targets - some analysts are sceptical even that current levels can be maintained. Not alone in seeing production growth falter, Shell will give more specific production targets with its full-year results early next year. Tellingly, however, the official presentation did not mention the word "target".

Shell has also given itself more flexibility by raising its oil price assumptions - the price of oil it assumes when it decides whether a project would be economic - to $25 per barrel on the back of record crude prices now above $50. This is higher than companies such as BP and ENI and Total, which have also raised assumptions, and will allow more exploration projects to go ahead. Ron Mobed, the president of consultancy IHS Energy, says that since oil companies raised their assumptions this year, he has already seen an increase in requests for data on new areas, suggesting that it is already having an effect.

Mr Hitchens says that the bar has been left deliberately low by new executives to manage expectations and avoid more missed targets. He points to the relatively high $1.20 per barrel finding cost as an example of targets that are "verging on the ridiculous". "Shell directors have spent the last year reading the newspapers about how bad they are," he says. "The last thing they want to read is that they have failed again."

Mr van der Veer's caution is understandable. Oil exploration and production require billions of pounds of investment and it takes up to a decade for some fields to come on-stream. Analyst JJ Traynor from Deutsche Bank says Shell has had some exploration successes this year. But there is no quick fix to its predicament of lagging reserve replacement and minimal production growth.

Mr Archer adds: "The problem Shell faces is that, despite big projects coming on-stream towards the end of the decade, there is nothing which will fill the near-term production gap over the next four years." One thing you can be sure of: this supertanker will take a long time to turn around.

SELL-OFFS WILL OIL THE WHEELS

Shell plans to raise between $10bn (£5.5bn) and $12bn from disposals in the next two years. It has already identified $8bn of non-core or underperforming assets to sell, and wants to raise another $5bn by selling off smaller and mature oil and gas fields. More businesses could be sold as new finance director Peter Voser only arrived this month.

BASELL

What is it? A chemicals company which Shell owns with German company BASF.

How much is it worth? Shell's 50 per cent stake is worth around $3bn.

Shell, which said it was reviewing "strategic options" for the venture with BASF over the summer, could also float Basell. But following strong buyer interest - first-round bids were tabled a fortnight ago - a sale early next year appears the most likely option.

INTERGEN

What is it? A global power- generating business, owning or building power stations which generate 16,000 MW. Another joint venture: Shell owns 68 per cent, with US conglomerate Bechtel owning the rest.

How much is it worth? Shell's stake could fetch $2bn.

LPG DIVISION

What is it? LPG stands for liquified petroleum gas, a clean-burning gas, usually bottled and used in cooking and heating systems. Shell produces and distributes LPG.

How much is it worth? Around $4.4bn.

http://news.independent.co.uk/business/analysis_and_features/story.jsp?story=575380