Shell not shocked to stare down a barrel

Oil crisis? It's just another day at the office

In a world of wildly swinging markets, there is one whose volatility towers above the rest. As one trader put it: "The only consistent thing about crude oil is its ability to take everyone by surprise."

And the market is never more jumpy than before an Opec meeting. In three days' time, the oil-producing cartel meets to decide its summer output quotas, and tensions are starting to show. Members are getting very heated about the growing market share of non-Opec producers such as Russia, and the rumbling prospect of another price war is a constant threat.

But all of this is just daily routine to Shell. Equity markets may make a big deal of small moves in the crude price, but from its offices on the South Bank of the Thames, the sprawling company famed for its conservatism feels it can afford to take the longer view.

"You can't base a business like ours on what the price of Brent is doing today," said Shell's UK chief executive, Clive Mather. "When you consider what it takes to set up an oil rig or even a service station, you can see why we work on a very long-term investment cycle".

All the majors have had their shocks; Shell is no exception. From soaring prices in the 1970s to the sudden spikes that characterised the Gulf War in the early 1990s, Shell's method of coping with the movements has been to calculate its internal reckoning of the price of crude, and base its decisions on that.

But sometimes the crude markets produce events that force sudden rethinks, and a prime example was the 1999 price slump to $10 per barrel. "It was a very significant development," said Mr Mather. "We re-assessed our whole portfolio against a chronically low-priced world. We even asked ourselves what would happen if crude fell to $7 per barrel."

Shell responded rapidly to what it saw as a critical wake-up call, re-organising its portfolio and seeking out more and more ruthless efficiencies. The group used the opportunity to widen its spread of operations as part of a diversification ethos. Although Shell sees the current oil price environment as being more stable than in the past, Mr Mather is "under no illusions" that the price of crude could tumble hard once again.

But as an integrated oil company, Shell has the added headache of managing the way that movements in crude prices are passed on to the customers. Through its global network of petrol stations, Shell is in the public eye and is forced to take the rough with the smooth.

The "rough" is frequently very difficult indeed. Petrol chains suffer from all the usual low-level wrangles that dog the wider retail industry but have the added challenge of appealing to the, literally, most mobile of customers.

But because of the British tax regime, UK petrol retailers find themselves in an even more curious position: they sell petrol at the cheapest prices in Europe, but customers pay the highest European prices at the pump. It is a reality that Shell believes is only now filtering through into public understanding.

Intense pricing competition between the majors, the supermarkets and the independent retailers has produced an environment where the margins on UK petrol are wafer thin, and still declining. While some have suggested that this might be a very good reason for Shell to reconsider the value of maintaining its UK network, Mr Mather is adamant that it must stay. "The retail network is your shop window and where the public sees you," he said. "We know the pain, it has been a battleground, but I think we have now got our strongest offering for 20 years."

In many ways, the petrol industry is still reeling from the fuel crisis that brought Britain to a standstill in late 2000 – a protest sparked by what the industry has since called the "two 80s". The first was fuel tax reaching 80 per cent, the second was a litre of unleaded reaching 80p. The events served to remind everyone that petrol remains a crucial part of British life, and that the industry that supplies it should be treated as a strategic one. "Don't forget, if you add up the chain from the well-head in the North Sea to the petrol pump, the oil industry is the biggest unpaid tax collector for Her Majesty's Government," said Mr Mather.

None of this was lost on the Government, which quickly realised that its control of the situation was looking decidedly weak. Some believed that the events drew the Government and the oil companies into a far closer relationship than before – a view some took as corroborated by the movement of Anji Hunter from the inner ranks of Tony Blair's advisers to the upper corridors of BP.

Shell rejects this take on events. "Our relationship with the Government is open and professional, but not cosy," said Mr Mather. That comment now seems particularly accurate in the light of the North Sea tax levied in a surprise move by Gordon Brown at the last Budget. Described by Shell as "unexpected and unwelcome", the tax has the effect of removing 10 per cent of the value of operations in the North Sea.

As well as the threat to future investment in the area, and the consequent risk to jobs, the move left an especially bitter taste for Shell, whose recent £4.3bn purchase of Enterprise Oil vastly increased its exposure to the region.

But, in time-honoured fashion, Shell remains stoical about the deal: "It doesn't change our position," said Mr Mather. "The tax was within our acceptable risk framework."