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New Shell boss Peter Voser must dig deep on costs and production

Daily Telegraph

Jeroen van der Veer inherited a company in crisis. As he prepares to step down at the end of this month, Shell faces another major problem — a market in crisis. 

Mr van der Veer was appointed as chief executive of Shell two months after the most embarrassing statement in the company’s history. In fact, it could arguably be one of the most embarrassing statements in corporate history.

On January 9 2004, the oil giant told an astounded market that it didn’t have as much oil as previously thought. Following what it called “internal reviews”, the company discovered that it had to recategorise a staggering one-fifth of its proven oil reserves – or 3.9bn barrels of oil equivalent. That’s enough to supply the entire world with oil for 50 days.

The mistake forced the group into an overdue reorganisation, which arguably would not have happened if the company had not got its sums wrong.

The crisis was just one issue that Mr van der Veer was forced to grapple with. Mr van der Veer’s job was simple on paper. He had to unify the group – then find more oil.

So how has he fared? And what are the challenges faced by his successor at the Anglo-Dutch energy behemoth?

For many years, Shell had been criticised as a lumbering giant. Its complex structure meant it was mired in red tape and organisational conflict.

The company had separate parts of business listed in different markets – and a mountain of bureaucracy keeping it together. In London, there was Shell Transport and Trading, which constituted the refining and distribution arm of the business. In Amsterdam, the Royal Dutch listing contained its oil production and exploration assets.

Even then, most Western oil companies were struggling to find new viable oil supplies – and Shell was lagging its peers when it came to reserve replacement.

Even now, Shell’s capital structure is far from simple. It has both A and B shares listed in London. The A shares have a potential liability for Dutch withholding tax on dividends if they are bought by UK investors because they have a Dutch source for tax.

In late 2005, the unification was complete. The reorganisation resulted in efficiencies of governance and organisation and allowed the company’s management to focus on its most important job – finding future production.

Shell has faced challenges growing its output. Its operations in Nigeria are prone to attacks from rebels and theft from pipelines. It has had well documented problems with the Russian government over its project at Sakhalin Island in Eastern Russia, but efforts have paid off.

The first shipment of liquefied natural gas (LNG) reached Japan earlier this year and, with production coming on-stream from other projects, the company is now predicting that it will see annual production growth from early in the next decade of 2pc — 3pc per year.

Mr van der Veer has been criticised for not cutting costs at the group quickly enough. Some of this criticism may be fair. However, he has had to contend with rising oil prices through most of his tenure – and the record profits were rolling in.

The company needed to focus on future production growth – its most pressing problem. Any cutting of costs while oil prices were so high would have resulted in staggering headline profits, increasing the chance of windfall taxes from a disapproving public. This would have been a distraction.

However, the situation has reversed over the last 12 months and profits have plunged. This has resulted in a scaling back in investment and, as Mr van der Veer recently pointed out, restricting investment now could lead to a spike in prices later – and all the consequences that would have for the economy.

Another issue to which the head of Shell will always be held hostage is dividends. BP and Shell alone account for more than one quarter of all FTSE 100 dividends, so cutting the payout to shareholders would be just as much of a market scandal as its reserves downgrade.

This means that the company – like BP – is going to have to borrow to make its payments to shareholders this year. Its gearing is set to rise from 7pc at the end of 2008 to more than 20pc this year.

The main challenge facing Shell’s incoming chief executive Peter Voser, the current chief financial officer, is to cut costs. The current market crisis has given him the ideal opportunity to reduce overheads. A month before he takes up the role the company has already unveiled a substantial reorganisation. For example, a new business unit called Projects & Technology will be created.

Mr van der Veer has taken Shell from being a lumbering, delay-prone machine into one that is capable of delivering future profit growth. This opportunity was created by a crisis. Now Shell needs to cut overheads and get more efficient, observers say. The current financial crisis and collapse in profits has given him the opportunity to do just that.

Shell is in a much healthier position that it was in March 2004 when Mr van der Veer took the helm. But there is still much more to be done. 

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