Shell to cut $2.5bn in costs and at least 4,000 more jobs

SHELL, the Anglo-Dutch oil giant, yesterday pledged to cut costs by $2.5bn, shed nearly half of its chemicals business and examined the possibility of merging as part of a radical restructuring plan designed to restore its battered image with investors.

Mark Moody-Stuart, Shell's chairman, said the overhaul would result in an exceptional charge of $4.5bn in the fourth quarter and at least another 4,000 job losses in addition to the 4,000 redundancies already announced from its worldwide workforce of 105,000.

But he said the impact on its UK workforce would be "limited" since it had already borne much of the pain with the 2,000 job losses and closure of its Shell Mex House headquarters earlier this year.

Details of the group's five-year revival plan were spelt out to analysts and fund managers in London and New York during a 90-minute conference that began with a blunt admission from Mr Moody-Stuart that Shell's reputation with investors was "on the line".

The response from the markets was muted with one analyst declaring that Shell still had "an acute credibility gap" and the shares drifting slightly lower.

Mr Moody Stuart said that Shell's management had 12 months to start delivering on the programme. "The world wil be able to see if we are making progress and if we aren't there will be consequences."

The Shell chairman said that the process of "clearing out the cupboard" would see eight of its 21 chemicals businesses - equivalent to 40 per cent of the division - sold off, including half of its interest in Montell, the world's leading polypropylene producer.

Shell is also selling off its interest in the Altura upstream oil venture with Amoco in Texas and part of its Tejas downstream gas assets in the US.

The group, which was overtaken as the world's biggest oil company by the Exxon-Mobil merger, said its target was to acheieve a 14 per cent return on capital by 2001.

The restructuring plan assumes that oil prices will remain at around $10 a barrel for the next year and average $14 a barrel over the next five years.

Mr Moody-Stuart said that at $10 a barrel Shell remained "financially robust" even though its profits had fallen much more sharply than rival oil majors this year while return on capital is running at 9 per cent.

On the prospects of a merger, Mr Moody-Stuart told investors: "We have looked at merger possibilities and will continue to look at such possibilities and, if the right opportunity arises, we will act."

However, he said there were no "active discussions going on at the moment and Shell had no need to seek a partner, pointing out that its oil reserves, at 19 billion barrels, were only 2 billion barrels fewer than Exxon-Mobil.

"Size isn't everything. To feel that someone has overtaken you gets the adrenalin going," Mr Moody-Stuart added.

The $2.5bn cost reduction target compares with $2.9bn of cost savings projected by Exxon-Mobil and the $2bn of effficiency gains that BP has said its merger with Amoco will yield.

As part of the efficiency plan Shell has set itself the goal of reducing costs in its exploration and production division from $3.3 a barrel at present to $2.5 a barrel by 2001.

Mr Moody-Stuart said that Shell employed $25bn more capital than Exxon and yet only earned the same return. That was why cost savings and more efficient use of capital was essential.

Shell refused to be drawn on how much the disposal of its chemical businesses would raise but Mr Moody-Stuart conceded that it was a "lousy" time to sell them because the industry was at the bottom of the cycle. The businesses being disposed of employed capital of about $5bn.

The target for return on capital set by Shell means it will need to achieve an improvement of 50 per cent on current levels. The highest targets - of 15 per cent - have been set for exploration, production and chemicals.

The market's verdict on the restructuring plan unveiled by Shell was guarded. Shares in Shell Transport and Trading, the London-listed arm of the group, closed 2.5p lower at 351.5p.

John Toalster of SG Securities, said: "Basically they are downsizing the company and they still have an acute credibility gap. Given the cost reduction and the chemicals sale, they are essentially putting the company under a microscope.

"But a 14 per cent return on $14 oil is better than Exxon achieves. A questionmark remains: is it achievable? We are hopeful but don't hold your breath.

Another analyst who declined to be named said: "It's not ideal but it is a betterpicture than it has been in the past."