Oil and gas multinational major Royal Dutch Shell is looking to cut around 40% of its upstream oil and gas operations to redesign its business toward a greener portfolio, according to sources involved in the costs review.
Shell’s new cost-cutting review (known as Project Reshape internally) is expected to be completed in 2020. It will affect its three main divisions and any savings will come on top of a $4 billion target set in the backdrop of the global pandemic.
With cutting costs, Shell can achieve its plans to move into the power sector and renewables where margins are somewhat low. Competition can intensify with utilities and rival oil firms, which include BP and Total all battling for market share as economics worldwide go green.
In 2019, the overall operating costs for Shell came to around $38 billion and capital spending totalled $24 billion. Shell is looking at ways to cut costs in its biggest division currently, the upstream, by 30% to 40% through cutting operating costs and reducing capital expenditure (CAPEX) on new oil and gas exploration and production projects.
The supermajor’s integrated gas division, which runs Shell’s liquefied natural gas (LNG) operations as well as gas production, is looking at deep cuts. The gas division and the downstream are also finding ways for cuts, as Shell wants to save capital for augmenting its power market portfolios and renewables, as per sources.
With the thrust toward a greener portfolio, Shell joins peers such as BP. It said in its new strategy recently that it would decrease its oil and gas production by 40% by 2030 via active portfolio management.
Furthermore, teams in Shell’s three main divisions are considering reshaping the business via slashing jobs and eliminating management layers to save money and create a more agile company as it prepares to restructure, the sources highlighted.
The supermajor which had 83,000 employees at the end of 2019, carried out a major cost-cutting drive after its $54 billion acquisition of BG Group 2016, which has helped improve its cash generation in recent years.
Shell Chief Executive Ben van Beurden said in July that Shell was on track to deliver $3 billion to $4 billion in cost savings by the end of March 2021, including through job cuts and shelving bonuses.
Furthermore, the review of refining operations includes looking out for ways to sharply increase the production of low-carbon fuels such as biofuels, chemicals, and lubricants.