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Shell to take axe to spending, jobs after $US53b BG Group takeover

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BG Group’s Queensland Curtis LNG project will be owned by Shell after the takeover.

Angela Macdonald-Smith: Energy Reporter: 23 Dec 2015

Oil giant Royal Dutch Shell has told shareholders the $US53 billion takeover of BG Group will act as a “springboard to change and reshape” the group, and outlined plans for job and spending cuts, as well as $US30 billion of asset sales that look certain to affect the business in Australia.

In a prospectus issued overnight for the takeover, which is heading for completion early next year, Shell cut expected capital expenditure for the merged group by $US2 billion to about $US33 billion, down 30 per cent from 2014 levels. It also slashed another $US1 billion from Shell’s own capex budget this year, dropping it to $US29 billion.

Some 2800 jobs will be cut from the combined group, or about 3 per cent of the workforce, on top of the 7500 global employee and contractor jobs being reduced at Shell alone this year.

Australia is one of two key areas driving the proposed takeover, along with deep-water Brazil, where BG also has a strong presence. Shell advised that pre-tax “synergies” from the deal, the largest takeover in the oil and gas industry for years, would be about $US3.5 billion “with further upside potential”. The targeted savings comprise $US2 billion of operating costs and a $US1.5 billion reduction in spending on exploration.

“The result will be a new shape for the Shell Group which Shell expects will be a higher return, higher cash generative group with better shareholder returns in any reasonably expected oil price environment,” it said.

BG’s business in Australia has doubled in size this year with the start-up of production from the $US20.4 billion Queensland Curtis LNG export project in Gladstone late last year. Shell owns half the Arrow coal seam gas venture in Queensland, which is expected to be more closely aligned with QCLNG after the deal.

Job losses

Industry sources suggest the takeover will result in job losses at office functions for the two operations in Brisbane and from some duplicated roles, although no details have been given on any planned cuts in individual locations.

Shell’s operations in Western Australia, where it is developing the Prelude floating LNG venture and has stakes in Chevron’s monster Gorgon LNG project and Woodside’s proposed Browse project, amongst other assets, are expected to be less affected by job cuts given BG’s lack of activities there.

The continuing slide in crude oil prices since the deal was first announced in April gave rise to some speculation that the transaction may founder, but Shell chairman Chad Holliday said the board recommendation for the deal was unanimous and pointed to the advantages to be secured in a weak oil price environment.

“Our industry has entered what could be a prolonged oil price downturn,” Mr Holliday warned.

“The Board is confident that the financials of the group will be further strengthened by this transaction. This should improve Shell’s ability to cover both dividends and investments. The result will be a more competitive and stronger company, for both sets of shareholders, in today’s volatile oil price world.”

Shell said the downturn in oil prices, which hit 11-year lows earlier this week, “could last for several years”. The merger plan “reflects market realities”, it said.

‘Impactful’ decisions

Chief executive Ben van Beurden said Shell was “pulling multiple levers” in response to the price downturn, cancelling a heavy oil project in North America and pulling out of exploration in Alaska.

“We aim to reduce costs and capital spending once again in 2016, as we combine Shell with BG, and continue to take impactful decisions on portfolio and options,” he said. 

Shell said its own asset sales for 2014 and 2015 combined should total about $US20 billion, while planning was “well advanced” for $US30 billion of divestments in 2016-18, assuming the deal completes.

The major has dramatically streamlined its portfolio already in Australia, selling out of Chevron’s Wheatstone LNG venture in Western Australia, and divesting its refining and marketing business to trader Vitol. It has also reduced its stake in Woodside Petroleum, and is at some stage expected to exit the register altogether, despite Woodside’s proposal for a selective buyback of the Shell stake being rejected by its shareholders last year.

The takeover will increase Shell’s LNG production capacity to 44 million tonnes a year, up from 26 million tonnes in 2014.

The merger is targeted for completion in early 2016 but has yet to go before shareholders, with a Shell shareholder meeting set for January 27 in The Hague and BG shareholders to vote on January 28.

The cash and scrip offer was originally valued at $US70 billion but that has dropped to $US53 billion with the decline in stock prices.

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