Shell Initiates a Major Cost-Cutting Campaign

By Adriaan Brits Tuesday, September 22, 2020

In order to focus on renewables and the power sector, which involves relatively low margins, cutting costs is essential. Royal Dutch Shell plans to cut as much as 40% off the cost of producing oil and gas as part of its plan to save money to restructure its business and invest more in renewable energy and power markets.

The company’s new cost-cutting strategy called “Project Reshape,” which is scheduled for completion this year, will impact the company’s three leading divisions, and any savings will be added to the $4 billion target set during the coronavirus crisis.

Major Campaign Launched

Shell’s operating costs from last year hit $38 billion, while capital spending amounted to $24 billion. The oil company is looking to cut expenses in oil and gas production, its largest business upstream, between 30% and 40% through cuts in operating expenses and capital expenses on new projects, according to Reuters.

Shell’s plan is to concentrate oil and gas production on some of its key production sites, including the Gulf of Mexico, Nigeria, and the North Sea. The company is also looking to cut expenses in its integrated gas business, which runs its liquefied natural gas (LNG) operations and a part of gas production.

Shell will face strong competition from rival oil production companies, including British Petrol and Total, all of them fighting for market share as global economies are going green. For instance, BP and Eni also announced their plans to invest in new low-carbon projects in the next decade and reduce their spendings on oil and gas production.

“We had a great model but is it right for the future? There will be differences, this is not just about structure but culture and about the type of company we want to be,” said a senior Shell source.

Regarding its downstream division, Shell is planning to slash costs from its network of 45,000 service stations, the largest in the world. The cost-cutting in downstream will play a major part in the business restructuring, two sources told Reuters.

“We are undergoing a strategic review of the organization, which intends to ensure we are set up to thrive throughout the energy transition and be a simpler organization, which is also cost-competitive. We are looking at a range of options and scenarios at this time, which are being carefully evaluated,” Shell’s spokesperson said in a statement.

Restructuring Process

Shell expects to complete the review by the end of this year when it plans to announce a major restructuring plan. According to media reports, this will be the largest review in Shell’s modern history.

On July 30, Ben van Beurden, CEO of Shell, said his company had developed a strategy to “redesign” the British-Dutch company.

The company’s team is analyzing how to restructure the business by significantly reducing their workforce and eliminating management layers in order to preserve capital and create more flexibility as it prepares for the revamp, sources said.

By the end of 2019, Shell had 83,000 employees. After it acquired the BG Group in 2016 for $54 billion, the company initiated a large-scale cost-cutting drive, which substantially boosted its profit generation in recent years.

Between 2014 and 2017, the company’s operating expenses that include production, manufacturing, sales, distribution, administration, and research and development expenses, plunged by 15%, or approximately $7 billion.

Furthermore, after the steep global economic slowdown as a result of the coronavirus pandemic and Shell’s plans to cut its carbon emissions to net-zero by 2050, the company decided to conduct another cost-cutting review.

Following the coronavirus-induced collapse in oil and gas prices and concerns that there might be lasting consequences on global energy demand, Shell slashed its 2020 capital expenditure plans by $5 billion.

Apart from cutting expenses in its downstream division, Shell is also looking to cut the number of its oil refineries to 10 from 17 last year. The company has already agreed to sell three of them.

Summary

Shell is planning to slash up to 40% in expenses of producing oil and gas in a major initiative to preserve cash. The idea is to reshape its conventional business and put more emphasis on renewable energy and power markets.

About the Author


Headshot for author Adriaan Brits
As an analyst of global affairs, Adriaan has an MSC from Oxford, with diverse interests in the digital economy, entertainment, and business. He is a specialist trainer in Advanced Analytics & Media.

Related Articles