Shell chairman relaxes financial targets and reveals £14bn war chest

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The oil giant Royal Dutch Shell yesterday took its foot off the brakes, declaring that it had a $20bn (£14bn) war chest to spend on acquisitions and easing the financial tests that new projects have to meet.

Delivering the company's annual strategy review to investors in London and New York, Phil Watts, the new chairman of Shell, said that henceforth the group would assume an oil price of $16 a barrel when deciding whether to sanction new developments. Under the previous target, projects had to be profitable at $14 a barrel.

The change brings its assumption into line with that of its rival BP, which raised its base price to $16 from $14 in July last year.

The lower threshold will allow Shell, the world's second biggest oil producer, to take on riskier development projects and acquisitions while still sticking to its target of achieving a 13 to 15 per cent return on capital.

Mr Watts denied, however, that Shell was easing up on the tough financial and operating controls that have enabled it to cut costs by $5bn a year since 1998 and reduce the workforce by a fifth to 90,000.

"We are not taking our foot off the pedal as far as costs and capital discipline are concerned," Mr Watts said.

Shell expects to achieve a further $1bn of cost savings over the next two years but Mr Watts said this did not mean there would be "draconian" job losses.

Investment will remain stable at around $12bn a year for the next two years but in the longer term Shell expects growth in capital employed of some 5 per cent a year.

However, Mr Watts said Shell stood by its latest and more conservative forecast of 3 per cent production growth a year over the five-year period up to 2005. The previous forecast was 5 per cent growth.

Shell's finance director, Judy Boynton, said that Shell's gearing could rise to 25 per cent, taking its net debt from nothing at present to $20bn to fund acquisitions.

But she and Mr Watts stressed that any deal would have to be a good strategic fit and add value. "We are looking at opportunities but the money is not burning a hole in our pocket," Mr Watts added.

Shell's shares rose 8p to 460p.