Shell's profits fall 70% after oil price slump

Further 'substantial' job cuts are to come, new chief executive warns
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The Independent Online

Royal Dutch Shell's profits dropped by 70 per cent in the second quarter, squeezed by both recession-hit demand and the falling price of oil.

Earnings in the three months to June dropped to $2.3bn (£1.4bn) from $7.9bn last year, while first-half figures showed a 64 per cent drop to $5.6bn.

With the oil price still around $63 per barrel, a far cry from last year's $147 high, the outlook for the sector is tricky and Shell is instituting a major restructuring programme to meet the changing conditions.

"Energy demand is weak. There is excess capacity in the market, and industry costs remain high," Peter Voser, the chief executive of Shell, said. "Conditions are likely to remain challenging for some time, and we are not banking on a quick recovery. Shell is adapting to this new situation, and we must do more. We are sharpening our focus on delivery and affordability."

Mr Voser has not wasted any time. He has been in the top job for less than a month. But immediately on taking over from Jeroen van der Veer, his predecessor, the new boss announced plans to reorganise the company, simplifying its structure in order to speed up both decision-making and implementation, as well as helping reduce costs.

Some 24,000 of the group's more than 100,000 staff could be at risk from the scheme, and 150 executives – or a fifth of Shell's management tier – have already been axed. Mr Voser was not willing to provide any numbers yesterday, but "substantial further staff reductions are likely".

"We are stripping away layers and overlaps that are of no value and putting more focus on frontline activities," he said. "This really means fewer people thinking about strategy and more people implementing."

The group is also putting in place significant cost-cutting measures. It has taken out $700m in the first six months of the year, and foreign exchange benefits contributed a further $2bn. But capital expenditure will come down by 10 per cent to $28bn next year and there will be more cost-cutting opportunities to come.

Mr Voser said: "I would go as far as to say that we shall generate cost savings opportunities, which will run into billions of dollars."

With $60bn spent every year on contracting and procurement – equivalent to an eye-watering $150m per day – cost-saving negotiations with the group's 12,000 suppliers across the world are likely to be a priority.

But the picture is not all doom and gloom. Shell's performance came in broadly in line with that of rival giant BP, which reported second-quarter profits down 53 per cent earlier this week. And despite the woebegone economy, Shell is upping its quarterly dividend by 5 per cent to 42 cents per share and the total interim dividend also by 5 per cent to 84 cents.

Even with the curtailed capital investment plans, the company is sticking to its target for annual production growth. "This is not about tearing up our strategy," Mr Voser said. "Upstream, Shell is still set to deliver between 2 per cent and 3 per cent growth into 2011 and 2012, and we have options in the portfolio that can deliver growth to 2020."

The company will stick to plans to invest $3bn this year in exploration and appraisal and has made six new exploration discoveries already. The plan is for a further 1 million barrels of oil equivalent per day of upstream capacity. Also, since January, new production has started up at both Sakhalin II in Russia and Parque das Conchas in Brazil.