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LEAKED SHELL INTERNAL EMAILS FROM JEROEN VAN DER VEER AND MALCOLM BRINDED DATED 29 JANUARY 2009

By John Donovan

The following leaked Shell internal emails contain candid admissions from Shell senior management not provided to shareholders in the Q4 financial results published on the same day. I have highlighted in bold examples of the candid admissions meant for Shell employees only. 

I supplied the leaked emails to Reuters who published an article after confirming the authenticity of both emails with Shell.

THE LEAKED EMAILS

—–Original Message—–
From: Van der Veer, Jeroen SI-GLOBAL
Sent: donderdag 29 januari 2009 11:12

Subject: Message to all staff from Jeroen van der Veer: 2008 Fourth Quarter and Full Year Results

Dear Colleagues

Let me start with our safety performance. In 2008 we continued to see a reduction in serious injuries. However, I am sad to report that 26 people – two staff and 24 contractors – lost their lives working for Shell, five more than in 2007. Seven died in Nigeria in one incident late in the year. That was followed in January by the deaths of eight people in a helicopter crash in Louisiana.

These deaths are heartbreaking. We must redouble our efforts to avoid such human tragedy. Work is well advanced on Group-wide Life-Saving Rules that focus on situations where the risk of death or injury is the highest. We will introduce them to all employees and contractors in the first half of the year. This will help to move us forward to Goal Zero.

We have announced our fourth-quarter and full-year 2008 results. We earned a record $31.4 billion for the year, underpinned by good operating performance. Thank you for your contribution!

Unfortunately, there’s little time for celebration. In the fourth quarter, lower prices and a rapidly deteriorating global economy translated into a 28% drop in earnings, to $4.8 billion. Demand for energy declined during the quarter. This year conditions have worsened and we expect a difficult 2009. Oil now sells for just over $40 a barrel, roughly where it was in 2004. But costs industry-wide have about doubled since then.

I’m glad our journey to top-quartile performance began before the slowdown. But we must now accelerate to get there more quickly, especially when it comes to cost. We should focus on the basics: running our operations as safely and efficiently as possible – and cut out things that are not essential. I see progress in our operations (thank you!), but we have more to do.

Our strategy is on track and we made good progress on the large projects we have underway. One of them, Sakhalin II, is coming on stream. This joint venture in eastern Russia, in which we own 27.5%, is a remarkable achievement. Off the coast of Sakhalin Island, in harsh, sub-Arctic conditions, three production platforms operate in water that is ice-bound for part of the year. Two pipelines carry oil and gas 800 kilometres to the southern end of the island – as far as from The Hague to Milan, Italy.

Indeed, we are on track to add a total of one million barrels per day to upstream capacity and three hundred thousand barrels per day downstream. In 2008 we made the largest investment in projects of any private company. Although we have slowed some investments and delayed decisions on projects, we still expect to invest in the range of $31-$32 billion in 2009, as we add to the foundations for our future.

We also increased our U.S. dollar dividend for our shareholders by 11% in 2008. We have announced a further increase of 5% for the first quarter of this year. That signals our confidence in the future.

To see full details of our performance, please read our Quarterly Results Announcement. But let me touch on some fourth-quarter highlights here. Upstream production was roughly steady at 3.4 million barrels of oil equivalent per day. A number of start-ups during the year added about 80,000 barrels of oil equivalent in the fourth quarter. And we had increased production from some existing fields. Those contributions helped offset declines and outages elsewhere.

In Gas & Power, fourth-quarter LNG volumes of 3.4 million tonnes were 1% higher than the same period a year ago. We benefited from the start-up of a new LNG train in Australia and increased gas supply in Malaysia. That helped offset the effect of a December shutdown at the Soku gas processing plant operated by Shell Petroleum Development Company in Nigeria, due to the security situation.

In our Oil Sands business, the Muskeg River Mine hit record production on November 29.

Downstream conditions are the toughest they’ve been since early this decade, with demand sliding in major markets. Oil products sales volumes fell 3% compared to a year earlier, excluding the impact of businesses we have sold. But our marketing businesses did manage to win a number of contracts during the quarter. Chemicals sales volumes fell 20% in the fourth quarter, mainly because of lower demand worldwide.

As you can see from our experience in the fourth quarter, these are challenging times. So far, we’re OK. But no one knows how long this economic crisis will last. As I said in my year-end note, we must all look for ways to reduce costs to help us emerge from this rough period stronger than ever. I have faith in your dedication and creativity!

Regards

Jeroen van der Veer?Chief Executive

—–Original Message—–?
From: Brinded, Malcolm SI-GLOBAL ?
Sent: donderdag 29 januari 2009 15:52?
Subject: Message from Malcolm Brinded : Q4 and Full Year Financial Results

The global economic crisis made for challenging conditions industry-wide in the fourth quarter of last year. Shell earned $4.8 billion in final three months of 2008, down from $6.7 billion in the same period a year earlier. Our performance reflects weakening worldwide demand and lower energy prices. Full-year earnings were $31.4 billion, compared to $27.6 billion in 2007. EP earned $3.7 billion in the Q4 period, down from $4.9 billion in the same period in 2007.

Thank you all for our results last year. You will see from the Group scorecard outcome of 1.25 that the overall 2008 performance was good, with record earnings and strong operational results, but a disappointing Total Shareholder Return. Our safety performance was mixed – a record low TRCF reflects tremendous efforts to achieve Goal Zero, but the many fatalities were again a tragic reminder of the risks of our business.

In my mid-December note to you I said these were extraordinary times. Today, just one month later, forecasters are predicting the recession will be sharper, deeper and longer. The effects are already reflected in our Q4 results. This reinforces that – good as it was – our 2008 level of performance will not be enough this year. We have to respond quickly, and we will.

Our future is guided by our strategy, Roadmap, and the 10 Must Wins. Our medium term priorities remain the same – but cash must be preserved in the face of an oil price below 30% of its peak six months ago. This will mean tough choices.
We have already taken steps to reduce exposure. We have deferred high cost projects, including Canadian Heavy Oil and Oil Sands. Following success in strengthening our portfolio, our New Business group, EPB, is proposing to cut 30% of its positions, becoming more selective in the new opportunities it pursues. Overall, we have to raise our game on the Roadmap priorities: improving safety, growing production, delivering projects, reducing costs and advancing operational excellence.

On safety, after a tragic 28 fatalities last year (including JVs and third parties), it has also been a dreadful start to this year with 10 contractor staff and one third party killed in three incidents – a road accident in Oman, an armed attack in Nigeria and a helicopter crash in the Gulf of Mexico. My heartfelt sympathies go to the families, friends and colleagues of those who have lost their lives.

The helicopter incident is very shocking as this is such a well-regulated industry and Shell’s overall helicopter safety record had been so good. In the last 15 years it has been four times better than the industry average, and in the last five years as good as commercial fixed wing operations with no fatalities. We will find out what happened and apply any learnings to continue to make our operations safer.

As we respond to the recession, we must not compromise our commitments to safety and asset integrity.

Our Goal Zero Must Wins remain on track and we are seeing some breakthrough results and pockets of excellence (more on safety here). Where we have been successful – such as eventually with Sakhalin road safety – we see the keys to be clarity and consistency of expectations, very strict compliance, and a culture of intervention. We will extend this approach, and soon roll out our ‘Life-Saving Rules’ covering 12 critical activities where most of our serious safety incidents occur.

While the rules are not new, it is the first time they have been prioritised clearly and applied to ALL employees across the Group – in EP, GP and Downstream. You will hear more about these from your leaders next month. Look out for them – get to know them – and follow them.

On production we must continue to improve asset reliability, well delivery, and well and reservoir management. In each area we’ve made progress. But against the headwind of low oil prices we need every asset to deliver its full potential. Every barrel is vital.

There are many great examples of production gains and cost savings from simplifying and standardising our processes. Across Europe 19 improvement exercises have saved $27 million – gaining more than 700,000 barrels of oil equivalent that would otherwise have been deferred. In our Sarawak and Sabah oil and gas fields in Malaysia we have reduced the time from drilling completion to production start-up of new wells from 22 days to less than one day. In the Changbei field in China, we have cut rig move times by more than half. Virtually every process we have is ripe for such simplification and acceleration; don’t wait to be asked but please offer up your ideas!

In terms of project delivery we have three very major start-ups over the next year and are looking for a flawless start-up of them all: Perdido in the Gulf of Mexico, BC-10 in deep water off Brazil, and Sakhalin, where LNG starts production next month with LNG exports soon after.

But we are still too slow in maturing our hydrocarbon resources and advancing projects through Decision Gates 2 and 3 to give us more options for the future. This is a key Must Win area and needs real push from everyone involved in this phase of the funnel.

Cost management in 2008 began to show the results of improvement efforts – especially in EPE. But we simply need much higher sustainable savings this year and I ask for real actions from all of you – from the major to the mundane. We must now urgently shift mindsets and habits. Eliminate, simplify, standardise. Reduce meetings, shorten studies and reports, 75% fewer slides! Shed contractor staff, challenge requirements, eliminate consultancy work, reduce travel massively, cut overheads everywhere. Many small changes will make a huge impact. This is about changing our behaviour and using the recession as an opportunity to improve the fundamentals of our business.

EPW showed what can be done by reducing transatlantic travel by about half last year. EPC lowered its regional overheads last year by nearly 20% to 2005 expenditure levels despite an average annual inflation rate of 12%. They achieved this by reducing expatriation and the office footprint and increasing the use of our various shared services platforms. Regions have identified further savings on opex and capex for 2009, and on this basis I have agreed an EP stretch target with Jeroen, Peter and the Board, which is allocated it to Regions and Functions. We now need to deliver.

One particular area of urgent focus is spending in EP on goods and services from third parties, currently running at some $80 million per day. Here we can and must make major savings, taking into account falling supplier costs.

We must ensure that our contracts reflect changing market conditions. We need to understand the cost drivers, find more efficient ways to work together, improve our planning, and standardise and simplify where possible. We will use our global leverage to ensure strong supplier relationships and competitively advantaged contracts – through the business cycle we have already shown we can change the game with category management of drilling rigs where long term contracts signed in 2005/6 were about 30% below last year’s market rates.

Last quarter, the Salym joint venture in Russia called in its top 35 suppliers to ask them to help deliver the 2009 programme at lower costs. Joint teams were formed and novel contract ideas introduced. As a result, Salym expects to deliver the same programme at 20% lower costs. We must do more of this.

Operational excellence is essential – and it is great we’re ahead of plan towards our 2010 top quartile goals in both assets and wells. There has also been some tremendous work simplifying processes and driving major cost savings using the ‘LEAN’ methodology. For me the significance lies in the astonishing step changes that are still found to be possible in just about all areas of our business when we apply a focused improvement effort, with teams working across organisational boundaries – united by a receptiveness to change. We all can – and must – challenge our own work processes, and step up to cut the waste and inefficiency that frustrates us all.

With the significant reduction in spending, global activity levels and oil price, adjustments to the size of our global workforce will be necessary. To this end, we will do everything possible and prudent to protect our core technical capabilities. For example, we will focus first on reducing the use of external contractors and consultants, constraining experienced staff recruitment (while maintaining graduate intake) and maximising the use of our present staff. But given the current expected magnitude of the recession, these efforts alone will not be enough. As such specific workforce reductions become necessary in parts of our organisation, we will, of course, engage with any relevant staff councils or other recognised consultative bodies. As any such actions become clear, any affected staff will be informed and treated in a way that is consistent with our Core Values and People Principles.

None of us has ever faced a recession as challenging as we now confront. This year will be critical. I am convinced that we have the skills and the spirit to weather the storm – by delivering on our production targets, ensuring our major projects start up on time, and making the changes we need for success in a difficult business environment. With a sharp and timely response to the recession, we can get competitive advantage from this crisis – and reach 2010 very well placed for the next decade.

Again my thanks for 2008 – and buckle up for 2009.

Malcolm

EMAILS END

Related syndicated article (linking to this article): “Shell gets tough on costs as oil prices bite” published on 30 January 2009 by numerous sources including: –

AOL

CNBC

Financial Post

Forbes

Guardian Online

International Herald Tribune

London Stock Exchange (AFX News)

MSN

National Post

Reuters

Scottish TV

The Oil Drum

USA Today

upstreamonline

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