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Shell COE Peter Voser warns of more redundancies

Sunday Telegraph

BP expected to exend gap with Shell in the battle of oil giants

The British oil major, now the biggest in Europe, is currently winning the race against its Anglo-Dutch rival

By Rowena Mason
Published: 8:12PM GMT 30 Jan 2010

Royal Dutch Shell is likely to endure more humiliation at the hands of BP this week, when it posts profits an estimated $1.7bn lower than its rival.

BP, which recently stole Shell’s crown as Europe’s largest oil company by market value, is likely to report profits of $4.6bn (£2.9bn). This 80pc up from $2.6bn in the last quarter of 2008 on a “replacement cost basis – a measure used by oil companies to strip out the effect of changing inventories.

BP is reaping the harvest of an aggressive $4bn cost-cutting drive that began before the recession and doubled in pace last year.

Meanwhile, analysts have been downgrading the forecasts for Shell’s profits over concern that its refining business has been performing below expectations.

According to consensus estimates, it is likely to report that profits have fallen to $2.9bn from $4.8bn in same quarter of the 2008, when it reports on Thursday.

Shell started cutting costs much later than its rival, resulting in 5,000 job losses during the downturn.

Its chief executive Peter Voser warned last week at the Davos economic summit that there were likely to be more redundancies this year.

“It’s normal in any business that you have to go further and you have to operate your operating expenditure in a very tough way,” he said, sounding a cautious note on global recovery. “As part of that, it may also mean that some more people have to go.”

Both the companies’ profits are expected be down sharply for the year – in the case of BP, 40pc lower at $15bn, and more than 60pc down at $11.4bn for Shell.

The first US oil company to report, Chevron, showed on Friday the difficulty of maintaining healthy profits when refining margins remain low, with hefty losses in that division.

The corporation posted a 37pc fall in quarterly profits, as the cost of producing petrol and diesel prices failed to keep up with a big rise in the cost of crude oil.

The second-largest oil company in the US made a net profit of $3bn between October and December, down 37pc from in 2008.

Data from BP shows that companies are now making just $1.49 per barrel of petrol product, compared with $5.19 a year ago.

Downstream divisions – responsible for refining, marketing and selling petrol-based products – are expected to suffer at all the majors, owing to lower demand in the recession. Many oil companies are frantically trying to offload their refineries, concerned about overcapacity in the industry.

Shell is in the process of selling its UK-based Stanlow refinery in Cheshire to Indian company Essar and three others in Europe.

A higher oil price of $76.13 in the fourth quarter – almost a third above last year – will have supported profits in the exploration and production arms.

But BG Group, the oil and gas producer, is still likely to report pre-tax profit of £1.05bn on Friday – down 10pc from £1.16bn a year earlier, with annual profits 23pc below last year’s £4.1bn.

Analysts often see discrepancies between BP and Shell’s performance as merely part of the cycle of rivalry between the two companies.

BP rose by 19pc on the stock market this year and boosted production to 3.9m barrels, while Shell fell by 3pc and saw its output drop below 3m barrels.

“Shell began restructuring last year, so is lagging BP, and furthermore its massive capex expenditure in recent years does not see new volumes start to kick in until 2011-2012,” said Richard Griffith, an analyst for Evolution Securities. “On balance, earnings won’t look great when they’re announced but we see more scope for positive surprises at BP and less dividend risk.”

Most industry experts are more concerned with the expected dash for new production assets in the aftermath of the recession than any temporary drop in profitability.

Citi analyst Mark Bloomfield said: “We expect the focus to shift from a defensive cost-saving mode towards pursuit of opportunities for expansion.”

This shift in emphasis towards new projects has led some City investors to favour Shell over BP.

Mr Voser has promised that Shell would commit to record capital expenditure. It is forecast to see a boost in output from European gas and Nigeria this year and, looking to 2013 and beyond, it will see new prospects at its Qatar gas-to-liquids project, and the Canadian oil sands come on stream. The company has staked its future on a number of technically difficult fields, including unconventional reserves in Canada and deepwater projects in the Gulf of Mexico and Brazil.

BP will also increase production over the next couple of years and is exploring deep drill sites in the Gulf of Mexico and under the Arctic ice.

However, it lacks its competitor’s big flagship projects to lift future output.

Sunday Telegraph Article

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