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Shell supertanker steers into deeper waters

FROM OUR SHELL NEWS ARCHIVE SEPT 2004

The Independent: Michael Harrison’s Outlook: Shell supertanker steers into deeper waters

“brotherly love has been notable for its complete absence inside the South Bank politburo, where the motto has been stab someone in the back before you are made to walk the plank yourself.”: Judging by the reaction in the City to the company’s strategic review, investors are not overflowing with the milk of human kindness either.”

Posted 24 September 2004

“Let brotherly love continue”, read the gilded inscription above the doorway of the livery hall where Shell yesterday unveiled its latest version of what passes for a strategy. Chance would be a fine thing. Far from continuing, brotherly love has been notable for its complete absence inside the South Bank politburo, where the motto has been stab someone in the back before you are made to walk the plank yourself.

Judging by the reaction in the City to the company’s strategic review, investors are not overflowing with the milk of human kindness either. The truth is that Shell will not begin to emerge from the black cloud which enveloped it in January until it has fundamentally changed the way the business is run and governed. That is still some months away and no amount of management gobbledegook about raising performance bars and the like, of which there was plenty on offer yesterday, will make much of a difference in the meantime.

The current chairman says he wants to inspire an “enterprise first” culture in what remains of the oil industry’s equivalent of the Kremlin but just look where “enterprise” got his predecessor.

Without a unified board and an ownership structure which can command confidence, the concept of Shell as an enterprising place remains an oxymoron.

That said, the strategy unveiled by Jeroen van der Veer yesterday was actually not a bad attempt at putting right what has been wrong for a long time. The hole Shell dug for itself by inventing reserves which weren’t there was the product of a philosophy which put pumping barrels and dividends above the need to go exploring to replenish production.

Belatedly, Shell is correcting that with a step change in investment which will see considerably more wells drilled over the next few years. Shell is doing what it needs to do, which is to use its size to take risks.

Unfortunately, this will be at the expense of some pretty flat production levels for the next five years which means that Shell’s ability to keep the dividend gusher turned on will depend heavily on oil prices staying high for a long time to come.

Shell is in the impossible position of being damned if it does and damned if it doesn’t. So the right strategy drew the wrong reaction yesterday. The decision to invest upstream is the correct one but the markets preferred to concentrate on the lack of a share buy-back.

Shell’s decision to sell assets which are mature, marginal or low-growth again makes sense. But all the outside world wants to know is whether Shell will slip on the same kind of slick left behind when it sold Cairn Energy some marginal acreage in a place called Rajasthan.

Like supertankers in mid-ocean, it takes a long time for companies such as Shell to change course, particularly when they have 100 years of baggage in tow.

It does not help either that those other two dreadnoughts of the oil industry, BP and Exxon-Mobil, are in the phase of the cycle when the wells have been drilled and the profits are being tapped.

The acid test of whether Shell is still stuck in the past century will come in November when it delivers the results of its governance review. It cannot arrive soon enough but if Shell is to escape from its past then it must be bold.

RELATED:

THE SADISTIC SACKING OF SHELL CHIEF EXECUTIVE WALTER VAN DE VIJVER: updated Sat 17 Nov with complete van de Vijver deposition

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