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Forbes: Shell Plans Cuts To Combat Costs

Vidya Ram, 01.02.08, 1:00 PM ET

LONDON – High oil prices are a double edged sword for the world’s leading oil companies, putting pressure on them to slash costs, as Royal Dutch Shell’s plans to outsource jobs reveals.

A spokeswoman for the Anglo-Dutch energy company confirmed they considered outsourcing jobs within their Internet technology department as part of a review launched in 2006 and that a further announcement would be made in the first half of 2008. Press reports have suggested that up to 3,000 jobs could go as a result, which the spokeswoman did not confirm.

Since 2005 Royal Dutch Shell (nyse: RDSA – news – people ), the world’s second largest oil company after Exxon (nyse: XOM – news – people ), has worked on simplifying its organizational structure to cut costs. “We see potential cost and operational synergies of around £0.5 billion ($1.0 billion),” said the spokeswoman.

The company has also restructured its operations in Nigeria, where it has suffered a number of setbacks, including frequent attacks by anti-government rebels, who have kidnapped employees and blown up pipelines, disrupting production.

Though the program is far less radical than the major restructuring program announced by BP’s new Chief Executive Tony Hayward in October, it reflects the pressure on oil companies to slash costs as the price of oil, which remains uncomfortably close to $100 a barrel has led to cost inflation, putting a pressure on margins.

“Their profitability is struggling due to cost inflation and government tax taking eroding their bottom line,” said Richard Griffith, an analyst at Evolution Securities in London. “The job cuts are symptomatic of that.”

Shell’s A shares were trading up 1.3%, or 27 pence (54 cents), at £21.38 ($42.44) in morning trading in London, while BP (nyse: BP – news – people ) was up 0.9%, at 621 pence ($12.32).

In October BP’s Hayward announced that the company would simplify its operational structure by dividing the company into two main divisions rather than three, with one focusing on exploration and production and the second on refining and marketing. Shell conducted a radical restructuring program of its own in 1995, when it hired the management consultancy McKinsey to help streamline their operations.

http://www.forbes.com/markets/economy/2008/01/02/shell-restructuring-jobs-markets-equity-cx_vr_0102markets07.html

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