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Shell carves more savings from BG Group deal, expects further job cuts

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Posted on November 3, 2015 | By Collin Eaton

HOUSTON — Shell has found another $1 billion in costs it could shake free after it buys BG Group, company officials said Tuesday, partly in response to critics of the huge acquisition Shell announced when crude was more expensive in the spring.

The cuts would mean more job losses on top of the 7,500 in layoffs Shell has announced this year, but officials declined to say how many jobs would be affected or lost.

The value of Shell’s original $70 billion offer for the British gas producer, which is known for its prized Brazilian deep-water fields and its big liquefied natural gas business, fell to $56 billion a month ago and edged back up to about $60 billion as Shell’s share price and crude prices have fallen. Shell had proposed to pay for the deal mostly with shares.

“The structure of the deal is doing its job as designed — a lower oil price, a lower offer,” Shell Chief Financial Officer Simon Henry told investors in a conference call Tuesday.

Shell’s plan for new cost cuts come after Big Oil’s blistering third quarter earnings season, which brought out deeper spending cuts and gloomy oil-price forecasts from large oil companies including Chevron and BP. The oil collapse is “having a transformative impact on the industry,” Tom Ellacott, head of corporate upstream analysis at research firm Wood Mackenzie, said in a written statement.

“The majors are now making real progress in reshaping their investment strategies for a sustained period of low prices,” Ellacott said.

Wood Mackenzie estimates the oil majors took a combined $9 billion in impairment charges in the third quarter, mostly because Shell scrapped a large Canadian oil sands project and stopped drilling in the Arctic Ocean north of Alaska. The research firm believes the oil majors’ crude production could sink in coming months or years because of their smaller investment budgets. Chevron and Total, for instance, have already lowered their production targets for 2017.

Related: Details on Shell’s global job cuts

Shell is boosting its cost savings from the deal from $1 billion to $2 billion, bringing its overall synergies in the acquisition to $3.5 billion. It’s also planning to reshuffle its $11 billion integrated gas business and its shale and oil sands assets into new separate units to help speed up corporate integration.

The Anglo-Dutch oil major is also planning to sell $30 billion in assets from 2016 to 2018 to make room for BG Group, and it expects to save money consolidating the two firms’ offices, back-office work and IT systems, as well as cutting jobs. It anticipates a $1.2 billion charge for severances and other costs.

Related: Shell could face steep fine for BG Group deal

All of these cost-cutting measures essentially mean the break-even point of the BG Group deal has fallen from the $70-a-barrel range to the $60-a-barrel range, more in line with market expectations for the price of Brent crude in the future.

“There’s really a different, more focused and profitable Shell coming through here,” Shell CEO Ben van Beurden said. And the BG Group deal, he added, “enhances Shell’s free cash flow and improves our dividend potential in any expected oil price environment.”

Shell’s move to consolidate its North American oil sands and shale business into a new unit mirrors a similar measure by BP last year, which was an effort to make its shale business more competitive with nimble independent operators that control most of the U.S. shale.

Shale has been a money-losing venture for the big European oil majors — except for Statoil — but van Beurden said splintering its shale and oil sands business doesn’t signal Shell has plans to withdraw from North American unconventional drilling.

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