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Shell Says Purchase of BG Group Would Allow Further Cost-Cutting

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By STANLEY REED: NOV. 3, 2015

LONDON — Royal Dutch Shell said on Tuesday that its planned acquisition of BG Group, the British oil and gas producer, would lead to major cost-cutting opportunities as well as sales of oil and gas properties.

As it prepares to complete the deal, expected early next year, Shell also said that it intended to carve out its own liquefied natural gas and related fuels unit into a separate business called Integrated Gas. One reason Shell agreed in April to buy BG for nearly $70 billion was to gain a world-leading position in producing and trading liquefied natural gas, known as L.N.G.

Although BG is only a midsize oil company, it is a major player in L.N.G., which is becoming an increasingly popular alternative to other forms of fossil fuels in many parts of the world. Because L.N.G. can be transported by ship, it does not make distribution of natural gas dependent on pipelines.

As an indication of the increasing importance of liquefied gas to Shell, the company said that Maarten Wetselaar, who will head the new Integrated Gas unit, will join Shell’s executive committee, its top management rung. Shell has invested heavily in L.N.G. in recent years — about a third of its overall $200 billion in invested capital, including a process called gas-to-liquids that converts natural gas into fuels like diesel and jet fuel.

Shell calculates that countries in Asia and other emerging markets will increasingly turn to gas, which burns cleaner than coal, as a fuel for generating power and for other uses. It is also betting that L.N.G., because it is not dependent on pipelines, will increasingly find markets in locales that have not traditionally burned natural gas.

Shell has been criticized for making a big acquisition at a time of low oil prices, but the company is portraying BG as an opportunity to cut and streamline its own portfolio.

Shell said that having studied BG, it had increased its estimates of the savings it would gain from the takeover. Shell said it now expected to gain $3.5 billion in cost savings through job cuts, procurement savings and other operational efficiencies.

Because BG holds undeveloped oil and gas properties in Brazil, East Africa and other areas, Shell, which has had lackluster exploration results, also says it can make large reductions in drilling and other exploration expenses. Previously Shell had put the overall gains from BG around $2.5 billion.

Shell also said on Tuesday that it planned to sell $30 billion in assets from 2016 to 2018, as it sheds the less competitive properties at both companies.

Shell is struggling to cope with the impact of lower oil and gas prices. Last week, the company reported a loss of $7.4 billion for the third quarter. The company took $7.9 billion in write-offs for operations including its recently halted exploration venture off Alaska and a Canadian heavy-oil project that it recently canceled.

“Low oil prices are driving significant changes in our industry; I am determined that Shell will be at the forefront of that and emerge as a more focused and more competitive company,” Ben van Beurden, Shell’s chief executive, said on a conference call with reporters on Tuesday.

SOURCE

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