Shell Updates Strategy to Improve, Grow

THE HAGUE, Netherlands -- Royal Dutch Shell is entering into a new period of growth, and outlined plans to sharpen up the oil company's performance and reduce costs, including exiting some retail markets.

Downstream, the company said it continues to focus on profitability, with plans to exit 15 percent of its refining capacity, and 35 percent of its retail markets and growth investment to enhance the quality of manufacturing and marketing portfolios.

Upstream, the company said production is expected to reach 3.5 million barrels of oil equivalent per day in 2012, an increase of 11 percent from 2009. In addition, Shell said it is assessing more than 35 new projects from some 8 billion barrels of oil equivalent (boe) resources, which should underpin upstream growth up to 2020.

As new projects come on stream, the Netherlands-based company expects its cash flow from operations to increase around 50 percent from 2009 to 2012 in a world of $60 oil prices, and by more than 80 percent with $80 oil prices.

"These are exciting times for Shell. We are poised to deliver a new wave of financial and production growth. We are making substantial investments in new projects to drive Shell's financial performance going forward. Shell should be in a surplus cash flow position in 2012, after capital investment and dividend payments, assuming $60 oil prices and a more normal environment for natural gas prices and downstream," said CEO Peter Voser. "We are moving into a delivery window across the next five years, and beyond that, we have a tremendous opportunity set for the 2015-2020 timeframe. We will put the emphasis on financial performance -- cash generation and returns."

Voser mapped out three distinct layers for Shell's strategy: nearer-term performance focus; medium-term growth delivery; and maturing next generation project options.

The nearer-term performance focus layer will include:

-- Continuous improvements in operating performance, with an emphasis on safety, asset performance and operating costs, including firm plans for $1 billion of cost savings in 2010, and staff reduction of some 2,000 positions by the end of 2011.

-- Asset sales of $1 billion to $3 billion per year as Shell exits from non-core positions across the company.

-- New initiatives expected to improve Shell's downstream unit by focusing on the most profitable positions and growth potential. Shell has plans to exit from 15 percent of its worldwide refining capacity, 35 percent of the company's current retail markets, and is taking steps to further improve its chemicals assets.

In terms of the company's medium-term growth delivery layer:

-- Shell has some 11 billion barrels of oil equivalent of new oil and gas resources under construction, and selective downstream growth opportunities. This is one of the most ambitious investment programs in the industry, according to Voser.

-- Its net capital investment is expected to be $25 billion to $27 billion a year for 2011-2014, with up to $3 billion a year of asset sales, and $25 billion to $30 billion per year of organic investment. Shell said annual spending will be driven by the timing of investment decisions and the near-term macro outlook as it invests for long-term growth.

-- Cash flow from operations excluding net working capital movements was $24 billion in 2009. Shell expects cash flow to grow by around 50 percent from 2009-2012 assuming a $60 oil price and more normal environment for natural gas prices and downstream margins. In an $80 world, 2012 cash flow should be at least 80 percent higher than 2009 levels.

-- Downstream, Shell is adding new chemicals capacity in Singapore and refining capacity in the U.S., and making selective growth investment in marketing.

-- Oil and gas production is expected to average 3.5 million barrels of oil equivalent per day in 2012, compared to 3.15 million in 2009, an increase of 11 percent, in line with previous guidance of 2 percent to 3 percent average annual growth rates, and with confidence in further growth beyond 2012, according to the company.

Lastly, in regards to maturing next generation project options:

-- Shell said it has built up a substantial portfolio of options for the next wave of growth in the company. This portfolio has been designed to capture price upside, and minimize the company's exposure to industry challenges from cost inflation and political risk.

-- Exploration delivered 2.4 billion boe of new resources in 2009, including new barrels in the Gulf of Mexico, North America tight gas and Australia. This was the best year for exploration in a decade, the company stated.

-- In the Gulf of Mexico, the company established at least three new production hubs, with more than 150,000 barrels of oil equivalent per day production potential for Shell.

-- In Canada, Shell said it retains options for further heavy oil expansion, with the nearer-term priority on improving operating efficiency and facilities de-bottlenecking.

Commenting on the growth outlook, Voser said: "Our 2009 earnings were sharply reduced by the recession, despite Shell's self-help programs and $2 billion of cost savings. Although oil companies have been cushioned from the recession by OPEC's action on quotas and oil prices, Shell has been disadvantaged recently, due to our higher exposure to refining and natural gas, where margins are hard-wired to the economy. This has come in a period where our spending is at historically-high levels, as we invest for medium-term growth."

According to the CEO, near-term pressures on downstream and gas margins remain. However, the medium-term upstream fundamentals are robust and Voser said they expect oil to trade typically in a $50-$90 range, and to trend to the upside. In natural gas, the medium term fundamentals are also attractive for Shell. However, the global refining industry may be in over-supply for some time, he noted.

"Shell's strategy is centered on strong operating performance and sustained investment for organic growth. That strategy is robust, despite the difficult economic environment. But the company had become too complicated and slower to respond than we'd like, so we are sharpening up," Voser stated. "The priorities are for a more competitive performance, for growth, and for sharper delivery of strategy. We have more to do to drive out cost and improve the operating performance in the company. We have come a long way in 2009, and I see tremendous opportunities for Shell in the future."

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