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Negotiation key to Shell boosting production

Financial Times: Negotiation key to Shell boosting production

Wednesday 22 June 2005

By Thomas Catan and Ian Bickerton in London

Royal Dutch/Shell, the Anglo-Dutch energy group, on Wednesday announced a package of measures designed to boost its flagging oil and gas production and gain access to new resources.

Jeroen van der Veer, Shell’s chief executive, said the company would set up a new “commercial academy” to train staff to negotiate more effectively with governments that control oil and gas resources.

The initiative was also designed to counter the growing threat from energy-hungry countries such as China and India, whose aggressive state oil companies were becoming direct competitors, he said.

“You have to be more sophisticated in how you make proposals to host governments who have oil or gas in the ground,” said Mr van der Veer.

“We have simply to do a better commercial play in the future than we did in the past.”

The oil industry is facing increasing difficulties finding new resources to replace the oil and gas already pumped from the ground. But Shell has had a particularly difficult time, a situation made worse after the company was forced to slash its official reserve estimates last year.

On Wednesday, Mr van der Veer said he expected Shell to be producing 5m barrels of oil equivalent per day by 2015 – up from about 3.8m today.

Shell’s effort to rebuild its upstream business has got off to a mixed start. In recent months, the company lost out on large oilfield contracts in Abu Dhabi and Oman.

However, it has gained access to new reserves of natural gas in Qatar, Libya and elsewhere.

In addition to better negotiating prowess, the company would have to capitalise on its biggest advantages – technology and access to capital – if it was to compete with state oil companies.

Mr van der Veer said he was prepared to substantially raise its $553m annual research and development budget in response to worthwhile new proposals.

Shell would also appoint 10 chief scientists to act as “role models and ambassadors in the outside world”. The company was criticised for failing to invest in new technology in the 1990s, when oil prices were low.

It will concentrate on capital-intensive projects costing several billion dollars – what Mr van der Veer termed “elephant projects”. Shell currently has three such projects under construction but wants 10 under way by 2015.

These are likely to include the development of “unconventional oil” resources, which are expensive and difficult to develop, such as Canada’s “oil sands”.

The company also wants to boost its position in liquefied natural gas, biofuels and “gas-to-liquids” technology, which can be used to turn natural gas into a liquid fuel for cars.

Shareholders are expected to approve plans to merge the Dutch and British companies that make up the group at Tuesday’s annual general meeting.

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