Royal Dutch Shell is cutting 6,500 jobs in Nigeria and at the rest of its global operations and will reduce capital spending by 20 per cent this year, as the oil company takes dramatic action in response to the plunge in oil prices.
The Anglo-Dutch group announced on Thursday its investment this year would decline $7bn from last year’s levels to about $30bn, a bigger drop than forecast just three months ago, as it axed and postponed new projects.
It expected to make further reductions to operating costs in 2016 after a 10 per cent fall this year.
The action comes amid savage cost-cutting and industry-wide moves to push back billions of dollars of spending on new projects following the collapse in crude prices over the last year. Some $200bn of spending on major oil and gas projects has now been deferred since the crude price began falling, a decline that accelerated when Opec opted not to cut output in the face of soaring US prodiction.
Shell reported a 37 per cent fall in second-quarter earnings to $3.8bn on a current cost of supplies basis excluding identified items — a measure of profits preferred by analysts. This compared with $6.1bn in the same quarter last year and beat analysts’ expectations.
The company pointed to improved refining margins and a strong downstream result, where profits more than doubled from $1.3bn to $3bn, that offset the impact of sharply lower crude prices-down now to $53 a barrel from last summer’s peak of $115.
Profits from exploration and production fell 78 per cent to $1bn and its Americas arm suffered a loss. Output declined 11 per cent to 2.7m barrels of oil equivalent a day from year ago levels.
In a statement updating investors on its proposed £55bn takeover of rival BG Group, Shell said that the deal was “on track” and the combined group would be reshaped on completion.
“We have to be resilient in a world where oil prices remain low for some time, whilst keeping an eye on recovery,” said Ben van Beurden, chief executive. “We’re taking a prudent approach, pulling on powerful financial levers to manage through this downturn, always making sure we have the capacity to pay attractive dividends for shareholders.
The reshaping of the combined group would include “reduced exploration spend, a fresh look at capital allocation in longer term plays, and asset sales spanning upstream and downstream. This should concentrate our portfolio into fewer, higher value positions, where we can apply our know-how with better economy of scale.”
The company warned that the oil price downturn could last “for several years”, taking a more bearish outlook on the crude price than only a few months months ago, and said its planning assumptions reflected “today’s market realities”. It saw the “potential” for a return to a $70 to $90 price in the medium term.
Shell said it anticipated a 6,500 reduction in staff and contractor job numbers in 2015 and forecast capital investment to be about $30bn, or $3bn less than it expected in April. The “pro-forma” budget for the enlarged group would be $35bn next year, less than projected previously.
This reflected “cost reductions, project cancellations and re-phasing of growth options”. It follows similar moves by other “supermajors” as they grapple with an industry downturn some have likened to the slump of 1986.
Shell said it would continue to “review both the ongoing projects under construction, and the medium term investment options, to balance returns, affordability and medium term growth potential.” Among the projects that are going ahead is Appomattox in the US Gulf of Mexico.
It expected asset sales to reach $20bn for 2014 and 2015 overall – and announced the sale of a one third stake in Showa Shell to Japan’s biggest second refiner Idemitsu for $1.4bn. The dividend stayed at 47 cents a share.
Analysts were upbeat, pointing to the strong contribution from Shell’s downstream operation – a common theme for the majors for whom the manufacture of refined oil product act as a hedge against lower crude prices – tougher cost control and the cuts to capital spending.
“It’s another strong beat,” said one. “The market will wait for the analyst presentation to take a final view on this. Shell will no doubt argue that the synergy numbers – and implied ‘breakeven’ oil price for the BG deal – are better than currently estimated.”
Shares in the group have under-performed those of rivals amid concern that Shell will struggle to make the BG deal work if oil prices stay low. Senior executives have responded by stressing to investors that more savings are to come and that the deal works at $70 as well as $90 a barrel.