Shell announces plans to deal with harder times.
The world's oil explorers and refiners are facing a spell of low oil prices, and recession-depressed demand leading to falling refining margins. While I'm sure demand will pick up again once economic growth gets back on track, and we will face times of higher oil prices once more, in the shorter term what is needed is to save on costs, cut excess capacity, and retrench for a tougher few years.
BP (LSE: BP) announced its next-decade plans just a couple of weeks ago, and this week it was the turn of Royal Dutch Shell (LSE: RDSB), with its own plans for the coming years. And Shell's strategy, not surprisingly, is similar -- increase upstream supplies and reserves, and improve efficiency in downstream refining and retailing.
Upstream growth
While BP is expecting upstream production to rise by 1-2% per year for the next few years, Shell is forecasting a rise of 11% by 2012, to a figure of 3.5 millions barrels of oil equivalent per day. That's a lot of black stuff. On the exploration front, Shell is investigating 35 new projects, which the company believes could deliver another 8 billion barrels, keeping growth going until 2020.
On the downstream side, cost-cutting is very much the order of the day and Shell's approach looks quite drastic, with the company targeting savings of $1bn in 2010 alone. To achieve that, Shell plans to cut its refining capacity by 15%, and its presence at the pumps by a full 35%.
Job cuts
And that, of course, is not good news for employees, with a further 2,000 job losses in the pipeline over the next two years, adding to the 5,000 already gone since chief executive Peter Voser took the reins of the company in July 2009.
Voser's focus is on simplifying and "sharpening up", saying "The priorities are for a more competitive performance, for growth, and for sharper delivery of strategy. We have more to do to drive out cost and improve the operating performance in the company."
All in all, the latest strategy sounds like a realistic approach to the current climate, if perhaps a little more drastic than BP's, so investors should probably be satisfied. And in a move that should further please some long-term investors, Shell is planning to introduce a scrip dividend scheme, whereby those who don't want the cash can opt to take more shares instead.
All in all, I reckon Shell is a good ISA stock -- there are far worse places to put some ISA money than one of the two big oilies, and a pharmaceuticals company (again, with the two biggies to choose from).
More from Alan Oscroft
> Alan owns shares in BP.
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