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Shell highlights decade of cost savings in BG merger strategy announcement

07 June 2016

Royal Dutch Shell will cease oil and gas operations in up to 10 countries in a drive to deepen cost cuts as it weathers weak oil prices and reduces debt following its $54 billion acquisition of BG Group. Shell also plans to sell 10% of its oil and gas production assets, and will rebalance its portfolio to include a greater presence in the gas market than some of the other large oil majors.

In a meeting to presenting its strategy following the close of the BG deal in February, the Anglo-Dutch group outlined plans to target annual spending of $25 billion to $30 billion until the end of the decade, or less if oil prices remain below $50 a barrel.

The company said this spending could go even lower if oil prices sink below their current levels, but crucially would not go higher if oil surges. Crude has stabilised at around $50 a barrel, after hitting a 12-year low of $28 a barrel in January. It was trading at more than $100 two years ago.

In 2016 capex was $29 billion, with exploration set at $2.5 billion, in a third cut from an initial $35 billion. Its new, higher target for savings from the integration of BG is now $4.5 billion.
Chief Financial Officer Simon Henry said the group was currently active in more than 70 countries and would in future focus on 13 important nations where it is making good returns.

Medium-term growth priorities include deepwater projects in Brazil and the Gulf of Mexico and its chemicals division, particularly in the United States and China.

A main source for cost savings, including 12,500 job cuts this year, will come from overlaps in operations in areas including Australia, Brazil and the North Sea. Shell will slow new investment in its integrated gas business, which includes its liquefied natural gas (LNG) operations, which it said has reached critical mass following the BG acquisition.

Chief Executive Officer Ben van Beurden promised shareholders Shell would generate double-digit returns for investors by the end of the decade. The BG merger has turned Shell into the world's second biggest  international oil major behind Exxon Mobil.

In the long term, the company said it would target shale oil and gas production in North America and Argentina as well as biofuels, hydrogen, solar and wind in a new energies unit.
Shell plans to sell $30 billion worth of assets around the world between 2016 and 2018 but did not say from which countries it planned to exit.

Ben van Beurden, chief executive, said he expected “robust demand” for oil and gas in the coming decades.

“By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focussed and more resilient company, with better returns and growing free cash flow per share,” he said.

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