Royal Dutch Shell: Managing Recession Challenges

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Royal Dutch Shell: Managing Recession Challenges

THE HAGUE, The Netherlands -- As part of its annual strategy review, Royal Dutch Shell will continue with plans to build new upstream and downstream capacity, while managing the near-term challenges of the global economic slowdown.

Shell said in a statement it is taking "a prudent approach," noting long-term oil and gas fundamentals "remain positive, but the industry is facing a sharp downturn in energy prices at a time when costs are high by historical standards."

"These are testing times in the oil and gas industry," said Jeroen van der Veer, CEO of Royal Dutch Shell. "The challenge in upstream [business] is to produce new barrels to offset natural field decline, and to create new growth. In downstream [business], we need to balance the continued demand from customers and governments for cleaner products, with the challenges to the industry from the cost of supply.

"The key to success sits with operational excellence, technology, project management and financial capacity, and I am pleased with the capabilities we have built in Shell," he said.

Shell launched very few new projects in 2007-2008, to avoid the peak in the cost cycle, the company said. This pause, combined with Shell's global scale, gives new opportunities to reduce supply chain costs ahead of launching new projects.

Major investments include: oil and gas fields with some having a capacity of approximately 1 million barrels oil equivalent per day, which will generate 2 to 3 percent annual production growth early in the next decade to 2012; new refining and downstream gas-to-liquid assets, totaling approximately 300,000 barrels per day of downstream capacity, a 7 percent increase for 2011-2012 compared to yearend 2008; and positioning Shell's leading fuels and lubricants marketing businesses in new growth markets and lower costs.

"We are rejuvenating the portfolio for profitability, scale and new growth, and Shell has made considerable progress," Van der Veer said. "Downstream, we continued with disposal of selected refining capacity in 2008, before the downturn in financial markets, bringing the total sold this decade to more than 800,000 barrels per day. These disposals have increased our average refinery size by 15 percent. Portfolio refocusing continues, with potential exits from certain refining and marketing assets in Germany and New Zealand portfolios, impacting a further 5 percent of Shell's global refining capacity."

Van der Veer continued: "The economic slowdown creates opportunities for Shell to reduce supply-chain costs, as spare capacity in the services industry comes into play. We don't have a crystal ball on oil prices, so we are planning on the basis that the downturn could last more than a year."