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Shell/BG vote is a bet on oil prices bouncing back

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Screen Shot 2016-01-13 at 08.05.25By Andy Critchlow January 27, 2016

Shell Chief Executive Ben van Beurden can breathe easier after shareholders backed his big gamble on oil prices rebounding. Only 17 percent of investors voted against his $50 billion takeover of BG Group on Jan. 27. Cost savings estimated at $3.5 billion will help assuage some worries, and paying partly in shares insulates some of the market effect, but the $60 oil Van Buerden says is needed for the deal to create economic value still looks far away.

Brent crude futures have dropped 46 percent since Shell announced the tie-up in April 2015, forcing Van Beurden to find more cost savings. Around 2,800 jobs will be cut from the combined company because of the deal, while Shell is reducing its workforce by 7,500 between 2015 and 2016. More savings may have to be found if oil prices continue falling. BG’s current headquarters in the sleepy British town of Reading are likely to become a stranded asset.

The vote may look like a vote of confidence that he can cut costs to the bone, and that oil prices will rise. It no doubt helps that oil bears will have sold out long ago – and that there is little else for oil majors to do with their cash beyond hoard it or give it back. Shell already axed plans to drill in the Arctic back in September. Teaming up with BG looks less risky, but should crude plummet to $20 per barrel and stay there, Van Beurden’s big bet could be his last.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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