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Shell Faces Even More Revamping

Olaf Kraak/Agence France-Presse — Getty Images

Jeroen van der Veer, right, chief executive of Royal Dutch Shell, with his successor, Peter Voser, now the chief financial officer.

Published: June 28, 2009

When Jeroen van der Veer took the helm of Royal Dutch Shell five years ago, the company was mired in an accounting scandal involving its reporting of oil and gas reserves, a flap that nearly ended its century-long independence. Mr. van der Veer revamped Shell’s notoriously complex corporate structure, merged its fractious English and Dutch entities, and eventually restored trust with governments, regulators and investors.

But as Mr. van der Veer, 61, retires this week, Shell still faces formidable challenges.

Costs have soared throughout the industry in recent years, leading to large overruns on flagship exploration and production projects. More recently, the drop in energy prices from last year’s highs reduced profits and led the company to scale back its investments in renewable energy. And last month, Shell announced a shake-up that could lead to thousands of layoffs.

Shell has turned itself around since the somber days of March 2004, when Mr. van der Veer was thrown into the top job to restore confidence in the company. Mr. van der Veer, who started at the company in 1971 and worked his way up, has been credited by most analysts in bringing about a turnaround.

The stock price rose more than 20 percent from mid-July 2005 to May 2008, so most shareholders did not question the need for major change. But like most oil companies that benefited hugely from rising oil prices in recent years, Shell was hobbled last year by the sudden economic downturn.

Now, the new management will continue the overhaul Mr. van der Veer started by merging some production units, flattening Shell’s unwieldy bureaucracy and reducing costs.

That responsibility will fall to Shell’s next chief executive, Peter Voser, the current chief financial officer, once he takes over on Wednesday, said J. Robinson West, the chairman of PFC Energy, a consulting firm.

“Shell has not been as agile or driven as some of the other majors are, but under Voser you can expect this is going to change,” Mr. West said. “He’s a dispassionate guy.”

The oil industry is struggling to adapt to a new and increasingly volatile economy. Oil prices rose to record highs last year, then fell steeply in December, and have since doubled to around $70 a barrel. After years of runaway inflation, paring costs has become a top industry priority. In the fourth quarter, Shell lost $2.8 billion. It returned to profitability in the first quarter, but its net income was just $3.49 billion, 62 percent less than the same period a year ago.

Shell has staked its future on continuing several large, complex projects in Qatar and Canada that rely on high oil prices. Its capital spending program of more than $30 billion this year is the highest of any oil major, including Exxon Mobil. (A common criticism in the industry is that while BP does not make enough money, Shell spends too much.)

The most prominent example of how Shell allowed costs to escalate was at its Sakhalin Island oil and gas exploration and production project in Russia, where expenses ballooned to $22 billion, more than twice the initial predictions.

Shell eventually lost control of the Sakhalin 2 project after the Russian government strong-armed the company to let Gazprom take over. Shell received $7.5 billion to cede control, but retains a 27.5 percent stake.

In its latest revamping plans, Shell said last month that it was taking steps to address problems in its management structure, which has been viewed as divided and fractious.

The company is planning to merge its power and gas division with its exploration business and create two new units — one covering the Western hemisphere, and another the rest of the world. The changes are supposed to make the company more nimble by having fewer layers of bureaucracy.

“Our behaviors need to change,” Mr. Voser said in a widely quoted message to employees. “That will mean that fewer people will make strategic decisions. More people will implement them, and improving performance will be our guide and goal. We will become a simpler place to work. These are key changes, aiming to make our company fitter for the future.”

As he prepares to leave, Mr. van der Veer says there is much the company can be proud of. The company is one of the global leaders in the liquefied natural gas industry, a business it helped create. It is also one of the biggest investors in Canada’s tar sands, where Shell is still investing though other producers have cut back because of the drop in oil prices.

It also a leader in deepwater drilling, and in Qatar, the company is developing an innovative plant to turn natural gas into transportation fuel.

Shell is also well positioned to gain a foothold in Iraq — which is often considered the last great exploration frontier for the oil industry. The company has already signed a large gas contract there, and has been quietly training Iraqi engineers abroad for several years.“I think we have come a long way,” Mr. van der Veer said in an interview last week. After retiring, Mr. van der Veer will stay on as a nonexecutive board member.

Mr. van der Veer defended the company’s decision to focus its alternative investments on biofuels, while curtailing most future investments in solar and wind energy. Shell is building one of the largest biofuel operations by buying pioneering biotechnology companies in Canada and Germany.

“When oil and gas prices are lower, we have to set our priorities, rather than spread ourselves thin,” he said. The company Mr. van der Veer is leaving is very different from the one he took control of five years ago. On his first day in the top job, he faced an anxious board as the company faced a hailstorm of criticism after an accounting scandal. Previous management had overstated the company’s oil and gas reserves, forcing the company to cut back its proven reserves estimates by 25 percent. The company’s chairman was ousted, while investors lost confidence and the shares tumbled. Some analysts bet that Shell would be forced to merge with another oil company before the end of that year.

Analysts credited Mr. van der Veer for quickly restoring confidence in the company. He abolished the company’s byzantine dual-holding structure — where the company operated as two entities in the Netherlands and Britain — which some analysts said led to lax oversight.

“Jeroen steadied the ship,” said Fadel Gheit, a veteran oil analyst at Oppenheimer & Company. “He put out the fire that almost engulfed the company after the reserves scandal. Unfortunately, he also had a tremendous period of inflation, which the industry never experienced before. They needed a financial guy to tighten the screws.”

In his final message to Shell managers and employees, Mr. van der Veer acknowledged some of Shell’s shortfalls.

“We have made progress at changing our culture and the way we behave,” he said. “In the past, the attitude for many senior managers was ‘self-first’ and there was too little attention to the big picture. Today that has largely disappeared.”

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