Michael Harrison's Outlook: Shell supertanker steers into deeper waters

Nuclear war; A bad way to bet
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The Independent Online

"Let brotherly love continue", read the gilded inscription above the doorway of the livery hall where Shell yesterday unveiled its latest version of what passes for a strategy. Chance would be a fine thing. Far from continuing, brotherly love has been notable for its complete absence inside the South Bank politburo, where the motto has been stab someone in the back before you are made to walk the plank yourself.

"Let brotherly love continue", read the gilded inscription above the doorway of the livery hall where Shell yesterday unveiled its latest version of what passes for a strategy. Chance would be a fine thing. Far from continuing, brotherly love has been notable for its complete absence inside the South Bank politburo, where the motto has been stab someone in the back before you are made to walk the plank yourself.

Judging by the reaction in the City to the company's strategic review, investors are not overflowing with the milk of human kindness either. The truth is that Shell will not begin to emerge from the black cloud which enveloped it in January until it has fundamentally changed the way the business is run and governed. That is still some months away and no amount of management gobbledegook about raising performance bars and the like, of which there was plenty on offer yesterday, will make much of a difference in the meantime.

The current chairman says he wants to inspire an "enterprise first" culture in what remains of the oil industry's equivalent of the Kremlin but just look where "enterprise" got his predecessor.

Without a unified board and an ownership structure which can command confidence, the concept of Shell as an enterprising place remains an oxymoron.

That said, the strategy unveiled by Jeroen van der Veer yesterday was actually not a bad attempt at putting right what has been wrong for a long time. The hole Shell dug for itself by inventing reserves which weren't there was the product of a philosophy which put pumping barrels and dividends above the need to go exploring to replenish production.

Belatedly, Shell is correcting that with a step change in investment which will see considerably more wells drilled over the next few years. Shell is doing what it needs to do, which is to use its size to take risks.

Unfortunately, this will be at the expense of some pretty flat production levels for the next five years which means that Shell's ability to keep the dividend gusher turned on will depend heavily on oil prices staying high for a long time to come.

Shell is in the impossible position of being damned if it does and damned if it doesn't. So the right strategy drew the wrong reaction yesterday. The decision to invest upstream is the correct one but the markets preferred to concentrate on the lack of a share buy-back.

Shell's decision to sell assets which are mature, marginal or low-growth again makes sense. But all the outside world wants to know is whether Shell will slip on the same kind of slick left behind when it sold Cairn Energy some marginal acreage in a place called Rajasthan.

Like supertankers in mid-ocean, it takes a long time for companies such as Shell to change course, particularly when they have 100 years of baggage in tow.

It does not help either that those other two dreadnoughts of the oil industry, BP and Exxon-Mobil, are in the phase of the cycle when the wells have been drilled and the profits are being tapped.

The acid test of whether Shell is still stuck in the past century will come in November when it delivers the results of its governance review. It cannot arrive soon enough but if Shell is to escape from its past then it must be bold.

Nuclear war

Ding, ding. Round two and British Energy is ahead on points in its epic scrap with shareholders. If it wins, the nuclear generator stays in business but ownership passes largely to the creditors. The green light from Brussels allowing Patricia Hewitt to sugar the deal with £3.4bn of taxpayers' money is not yet the clincher. But it does put the BE board in a stronger position as it grapples with the US hedge fund Polygon, which thinks it and the other shareholders have been stitched up, since they will end up with just 2.5 per cent of the company and bondholders the rest.

Whether the contest goes 12 rounds depends on what happens over the next couple of days in New York where a district court judge is being asked to bar Polygon from convening the extraordinary meeting it needs to block the refinancing, at least until BE has got its own EGM out of the way. If the judge rules in favour of Polygon, it will amount to a technical knockout since BE will not be able to delist the company and press ahead regardless with the refinancing if shareholders vote against it, as they surely will. Unfortunately, it would be a pyrrhic victory since the consequences will be insolvency for British Energy. The creditors, who are owed £1.5bn, would be badly winded but for shareholders it would be total meltdown.

The nuclear stations themselves and the people working there, who seem to have been ignored completely in this self-interested spat between bondholders and shareholders, would continue to operate. The Government would be obliged to ensure as much. It's just that the industry would, in all likelihood, be back in full public ownership, which is perhaps where it ought to have stayed. It is no accident that the two privatisations carried out with indecent haste in the dying days of the last Conservative government - nuclear and rail - have both ended in tears.

As usual, the lawyers are going to be the only sure-fire winners. They are raking in fees at such a rate that the costs of BE's restructuring now exceed its stock market value.

Will Polygon throw in the towel if it loses the court case? Hard to say but at this stage it must be getting punch drunk, especially as the bondholders have now initiated separate legal action against it. The one great unknown is whether and, if so, how Polygon has laid off its exposure. Perhaps it owns shares in a law firm.

A bad way to bet

Bingo! Well, almost for the gaming giants of Las Vegas who have been given carte blanche to erect a mega-casino in your neighbourhood faster than you can shout House! A rotten spin of the wheel, on the other hand, for domestic players such as Rank, who will not be allowed to turn their one-armed bandits into £1m slot machines. Tessa Jowell wants those kept to shiny new developments where there are restaurants and cinemas to spend your hard-earned benefit money on as well as a gambling den.

Gaming is one of those areas where civil liberties, competition concerns and social policy clash horribly, a bit like licensing laws. Should the Government be trying to encourage gambling or should it be trying to curb it? Does the consumer interest lie in allowing open and unfettered competition between all gaming operators or is it best protected by ensuring that gambling remains a minority sport pursued by consenting adults? In short, is gaming a social curse or a source of valuable tax revenue?

The Government, in its craven way, has decided it is the latter. But it has to make sure that the tax is not so punitive that it kills the golden goose in the shape of US operators such as MGM Mirage and Harrah's, who are just itching to set up here. The fig-leaf of a justification, for what it's worth, is that they will be making a valuable contribution to urban regeneration. Can Ms Jowell really not think of a better way of achieving this end or is her department as morally bankrupt as the rest of Tony Blair's government increasingly appears to be?

m.harrison@independent.co.uk

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