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‘To invest or not to invest, that is the question’

Financial Times

Published: April 29 2009 20:40 | Last updated: April 29 2009 20:40

When Jeroen van der Veer looks back on his five years as chief executive of Royal Dutch Shell, he reaches for a phrase from John F. Kennedy.

One of his priorities, he says, was to change the culture, so that Shell employees thought less about themselves, and more about “what you can do for the company”.Shell thumbnail

In the fevered atmosphere of the company in 2004, after it was revealed that its oil and gas reserves had been misreported for several years, that culture change was badly needed. The incentives for managers and staff had to be put straight.

“If you do good for the company, you make progress in the company or you get more salary,” Mr van der Veer says now.

“I think, if you look at what has happened now in some other industries over the past year, we were ahead on that, frankly.”

It is an approach that is characteristic of his management style. “I come from a Calvinistic country where you simply work and try to do good, but never say you are pleased about it,” he has said.

In person he is lively, with a sharp sense of humour, but in his leadership of Shell he has been steady, consistent and careful.

It is a measure of his success that Shell now seems well able to maintain its independence. When he took over, and for a year or two afterwards, that was not the case. “We had the problem with the reserves and we had to get it behind us,” he says.

Yet as he comes to the end of his tenure – he steps down at the end of June – his management is facing its sternest test since that crisis.

The plunge in the oil price from a peak of almost $150 last July to about $50 today – while industry costs remain, for the moment, at highly inflated levels – is putting enormous pressure on the industry.

Analysts at Bernstein Research have argued that the profitability of the large oil companies’ production (as measured by net income per barrel of oil or gas) in the first quarter of the year is likely to have been the lowest this decade.

The industry is, in effect, back to the days when oil was about $10 per barrel, and many of the biggest companies – Shell not among them – were forced to merge to cut costs.

Today the concern is not about Shell’s survival, but about its long-term prospects. There is a risk that the squeeze on the company’s finances will choke off the investment in new projects that will be sources of growth.

As Mr van der Veer puts it: “To invest or not to invest, that is the question I think about.”

His answer, so far, has been to invest. Shell plans this year to have the world’s biggest private-sector capital spending programme, investing $31bn-$32bn, slightly more than last year and well above BP’s plan for less than $20bn.

At today’s oil prices, however, Shell is not generating enough cash to fund that capital spending programme and its dividend.

“We are not immediately nervous at the oil price even if the oil price is $35 per barrel,” Mr van der Veer says.

However, he adds: “If the oil price stays fairly low, your gearing would run up all the time because you are still a high investor and you pay dividends. At certain volumes it may go up too high.”

Gearing – net debt as a proportion of capital employed – is set to rise from about 7 per cent today to the low 20s by the end of the year. Mr van der Veer would “prefer” to keep it below 30 per cent.

That is why Shell is trying to drive down costs, cutting thousands of jobs and negotiating price cuts with suppliers.

“If the business environment stays fairly lousy – I don’t hope that, but if that’s the case – then we expect very large procurement savings from all our suppliers,” Mr van der Veer says.

Already, costs in some areas are down 15-20 per cent.

Hiring rates for drilling rigs are being renegotiated at prices 10-30 per cent below their previous levels, which were agreed in 2005-2006 and so are already below the peaks reached in 2007-08.

Those cost reductions will help Shell keep up its investment in new projects.

Getting the investment strategy right in the next decade will be a job for Peter Voser, chief financial officer, who will succeed Mr van der veer.

“A new leader should do new things,” Mr van der Veer says. “We worked together on the subject over the past so many years, but in the end, it is over to him.”


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