Shell touts bigger cost savings from merger with BG Group
Energy company Royal Dutch Shell will cut more costs, more quickly than previously planned, as a result of its merger with BG Group Plc this year.
The Anglo-Dutch company made the announcement Tuesday as it tried to assure investors that it could handle the debt that came with its US$54-billion takeover. Critics have questioned the deal following a drop in oil prices.
"Integration is gathering pace, and today we expect to deliver more synergies, and at a faster rate," Shell CEO Ben van Beurden said.
Shell argues the deal, which increased the company's proven reserves of oil and natural gas by 25 per cent, provided opportunities to cut costs by eliminating duplication. Thousands of jobs have been cut and investments have been postponed.
Van Beurden said Tuesday that synergies in absorbing BG would result in US$4.5 billion in savings by 2018, up fromthe US$3.5 billion estimated earlier.
The deal has caused concerns because it came as the price of oil was dropping. Brent crude, the benchmark for international oil, hit a 12-year low of US$27.10 a barrel in January after
trading above US$100 as recently as September 2014. It traded at US$50.97 on Tuesday. Prices are down because production has remained high despite slower economic growth, particularly in China.
Van Beurden set out priorities intended to improve returns and cash flow, which has been hit by low oil prices. Investment for 2016 is expected to be US$29 billion, excluding the purchase price for BG or 35 per cent lower than what Shell and BG combined had spent in 2014.
He described deep-water drilling and chemicals as being growth priorities. The company announced a final investment decision in a new plant in Pennsylvania.
Planned asset sales are expected to be US$30 billion for 2016-18. Shell said it is also moving to exit from between five and 10 countries, as it earmarks 10 per cent of its oil and gas production for disposal.
Christian Stadler, a professor of strategy at Warwick Business School, said Shell needs to focus on where its expertise lies such as offshore and liquefied natural gas with the BG merger.
"A less active profile in some countries, therefore, can only be a good thing," he said.
"Shell focusing on where it is more established and more confident ... therefore makes sense from a cost-cutting perspective."