Before Shell made the announcement, few people, even inside the industry, knew who van Beurden was. He only recently joined Shell’s executive committee and was by no means leading the pack of executives expected to succeed Voser.
But upon closer review, he may be just the right man for the job. Let’s take a closer look.
Shell’s new CEO
Van Beurden, who holds a master’s degree in chemical engineering, joined Shell in 1983. From 2007 to last year, he ran Shell’s chemical business, where he oversaw various initiatives in refining and chemicals manufacturing. His keen focus on slashing costs, which he accomplished by using natural gas instead of oil at Shell’s plants in the U.S. Gulf coast, has yielded impressive results.
Under his watchful eye, Shell’s chemicals unit saw its profits more than triple over the past five years, from $416 million in 2008 to $1.4 billion last year. In fact, Shell’s downstream division, which encompasses refining, chemicals and marketing, now represents a fifth of the company’s net income and a quarter of its operating cash flow.
Another area where van Beurden may shine is in helping grow Shell’s natural gas business. Under Peter Voser’s reign, natural gas has become a much bigger part of the company’s operations. Earnings from its integrated gas division, which encompasses its LNG business as well as gas-to-liquids facilities such as Pearl in Qatar, have almost quadrupled over the past five years. In fact, Shell is set to produce more gas than oil this year for the first time in its more than a century-long history.
With his extensive experience with natural gas, and especially LNG, this is where van Beurden should be able to continue, and hopefully improve upon, Voser’s legacy. After becoming Shell’s general manager of operations of Malaysia LNG in 1996, he was promoted to Shell’s vice president of Mexico Gas and Power. In addition, he was heavily involved in some of Shell’s most important LNG projects, including its Prelude floating LNG plant in Australia.
Challenges for van Beurden
But despite the solid performance from its downstream operations and its integrated gas division, Shell and van Beurden face their share of hurdles. Amongst the Western oil majors, Shell is the No. 2 company by production behind only ExxonMobil (NYSE: XOMÂ Â ) . But like most of its competitors, it has struggled to grow its oil and gas production and replace its reserves.
In fact, its reserve replacement ratio — an important metric that measures the extent to which companies are replacing the oil they produce with new reserves — is among the lowest in its peer group, coming in at just 85% last year. By comparison, Total (NYSE: TOTÂ Â ) reported a reserve replacement ratio of 93% last year, ExxonMobil and Chevron‘s (NYSE: CVXÂ Â ) ratios came in at an impressive 115% and 112%, respectively, and BP‘s (NYSE: BPÂ Â ) was just 77%, the worst among the oil majors.
In addition to the broad challenges of stagnant production and difficulty in replacing reserves, van Beurden will also have to rectify the company’s beleaguered operations, including its operations in Nigeria, which have been plagued by oil theft and sabotage that cost the company some 100,000 barrels per day in lost production during the second quarter, and its oil campaign in Alaska, which was recently placed on pause because of regulatory, environmental, and other uncertainties.
The bottom line
But despite this array of challenges, I think van Beurden will inherit a company in much better shape than it was a decade ago, when the infamous 2004 reserve overstatement scandal led to the ouster of its top executives and severely tarnished the company’s reputation.
Peter Voser, his predecessor, has been a solid CEO in many respects. Specifically, I think he has helped turn Shell into a more predictable company, with an emphasis on investing in projects that will provide stable returns for decades to come, such as its LNG ventures in Australia, Canada, and Angola. While only time will tell if van Beurden can improve on Voser’s legacy, his extensive experience and success with downstream and LNG suggest that he may be just the right man for the job.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned.