A long way to go in Shell awakening

Outlook

SHELL YESTERDAY rose to the challenge of its City critics and announced an ambitious new return on capital target which, at 14 per cent, is more than 50 per cent higher than that presently achieved.

Subject, that is, but not limited to, "price fluctuations, actual demand, currency fluctuations, drilling and production results, reserve estimates, loss of market, industry competition, environmental risks, physical risks, legislative, fiscal and regulatory developments, economic and financial market conditions in various countries and regions, political risks, project delay or advancement".

Phew! Might it not have been simpler to say "this is not a forecast"? There were so many caveats and letouts in yesterday's statement that it is no wonder the City felt a little uncertain about Shell's commitment to its new goals. But let's be charitable and assume this all to be the usual legalistic mumbo jumbo. Has Mark Moody Stuart, Shell's chairman, done enough to keep the wolves from his door?

By Shell's recent standards, the new target of a 14 per cent return on capital employed by the year after next is positively heroic, even though it doesn't compare favourably with the 17 per cent recorded by BP and Exxon last year. Shell is being perhaps a little optimistic in assuming a $14-per-barrel oil price, given that at present the price is below $10 a barrel. But to be fair, hardly anyone in the industry is banking on it remaining at this depressed level; this is a business where things can change rapidly. That, in any case, is what the industry is hoping for.

What of the rest of this package? Given the starting point, projected cost cuts of $2.5bn per annum do not look particularly impressive set alongside the $2bn BP has promised from its merger with Amoco and the $2.9bn expected from the Exxon/Mobil merger. Don't forget that Shell will still be larger than BP even after BP has merged with Amoco, so it ought to be doing better than this. BP will certainly better its promises, and so will Exxon. All of which suggests that the game will continue to move ahead of Shell. BP and Exxon will be drawing away as fast as Shell tries to catch up.

Shell has some terrific assets, but they have not been managed terribly well. It is a cliche to refer to the continuing problem of the company's national and other fiefdoms, but until someone tackles them, it is not clear that Shell is capable of sustained progress.

A persistence of the low oil price might eventually deliver the required shock to the system, and prompt more radical action. But it may well be that Shell needs an American-style chief executive, with sweeping semi- autocratic powers, to bring about the required level of change. Shell's statement yesterday does little to address the central problem of the group's collegiate style of management.

Mr Moody Stuart may have gone as far as he can given the constraints under which he operates, but it all looks too reactive to do the trick.