© Reuters. The Royal Dutch Shell logo can be seen at a petrol station in Sint-Pieters-Leeuw.
From Ron Bousso
LONDON (Reuters) – Royal Dutch Shell (LON 🙂 plans to cut oil and gas exploration costs by up to 40% to save money so the company can revamp and focus more on the renewable energy and power markets , sources told Reuters.
Shell's new cost-cutting review, known internally as Project Reshape and expected to be completed this year, will affect the three main divisions. All savings are on top of a $ 4 billion goal set after the COVID-19 crisis.
The cost reduction is critical to Shell's plans to move into the power sector and renewables, where margins are relatively low. Competition is also likely to intensify as utilities and rival oil companies like BP (NYSE 🙂 and Total battle for market share as economies around the world go green.
"We had a great model, but is it right for the future? There will be differences, it's not just structure, it's culture and the type of company we want to be," said a senior Shell source who refused to be named.
Last year Shell's total cost of ownership was $ 38 billion and capital expenditures were $ 24 billion.
Shell is currently exploring ways to cut spending on oil and gas exploration, the largest division known as Upstream, by 30% to 40% by cutting operating costs and investing in new projects, two sources involved in the review told Reuters.
Shell now plans to concentrate its oil and gas production on a few key hubs, including the Gulf of Mexico, Nigeria and the North Sea.
The company's integrated gas division, which operates the LNG (Shell Liquefied) operation and part of the gas production, is also currently examining far-reaching cuts.
For the downstream businesses, the review focuses on reducing costs from Shell's 45,000 gas station network – the largest in the world – which is considered one of its "most valuable activities" and is expected to play a critical role in the transition, with two others Sources involved in the review said Reuters.
"We are going through a strategic review of the organization to ensure that we are successful throughout the energy transition and a simpler organization that is also cost effective. We are currently examining a number of options and scenarios that are being carefully examined," said a spokeswoman for Shell in a statement.
Graphics – Shell operating costs: https://graphics.reuters.com/SHELL-COSTS/oakpeoralpr/chart.png
The mirrors of Shell's restructuring have been implemented in recent months by European rivals BP and Eni, both of whom plan to reduce their focus on oil and gas over the next decade and build new low-carbon businesses.
The review, which company sources say is the largest in Shell's modern history, is expected to be completed by the end of 2020, when Shell is set to announce a major restructuring. An investor day will take place in February 2021.
On July 30th, Shell boss Ben van Beurden spoke to analysts about the fact that Shell had started a program to "restructure" the Anglo-Dutch company.
LOW CARBON FUEL
The teams in Shell's three main divisions are also exploring how the business can be reshaped by cutting thousands of jobs and removing levels of management to save money and create a more nimble company preparing for the restructuring.
Shell, which employed 83,000 people at the end of 2019, made a significant cost reduction after acquiring BG Group in 2016, valued at $ 54 billion, which has helped boost cash generation significantly in recent years.
Shell's operating costs, which include manufacturing, manufacturing, selling, selling, administration, and research and development costs, decreased by 15%, or approximately $ 7 billion, between 2014 and 2017.
The sharp slowdown in the global economy as a result of the COVID-19 epidemic, coupled with Shell's plans to reduce CO2 emissions to zero by 2050, has led to the new foray.
Shell cut its investment plans for 2020 by $ 5 billion to $ 20 billion after oil and gas prices collapsed due to the pandemic amid warnings that could have a lasting impact on global energy demand.
Van Beurden said in July that Shell was on track to deliver $ 3 billion to $ 4 billion in cost savings by the end of March 2021, including downsizing and suspension of bonuses.
He said travel restrictions during the pandemic had accelerated Shell's digitization, while machine learning was introduced to minimize downtime and cut maintenance time at refineries, oil and gas rigs and LNG facilities.
In addition to cutting costs in its downstream retail business, Shell is pushing plans to cut the number of its oil refineries from 17 last year to 10. It has already been agreed to sell three.
The review of refining operations also includes finding ways to greatly increase the production of low carbon fuels such as biofuels, chemicals and lubricants. This could be achieved by using low carbon raw materials like cooking oil, a source said.