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Shell gearing up for difficult environment

Financial Times

March 17, 2009 12:12pm 

Updated – More on gearing, production, renewables and Australian coal bed methane after the jump

Jeroen van der Veer has been setting out his core message: the world is in recession and this is “a difficult financial environment indeed,” but Shell is staying focused on the long term.

It is investing in projects to come on stream over the next few years that will lift Shell’s production by 2-3 per cent per year between now and 2012.

He highlighted two projects in Qatar, Pearl gas to liquids and QatarGas 4, due to finish construction around the end of 2010, as examples of Shell’s growing portfolio of “long life” assets, that can sustain a production for many years or even decades, rather than declining the way conventional oil fields do.

Where the short term does come in, van der Veer says, is in terms of cash management. Soaring costs and plunging oil prices are squeezing Shell’s cash flow, as they are for all oil companies.

He stressed several times the virtue of a “flexible” balance sheet. In other words, he expects gearing to rise.

Update: More detail from Peter Voser, the CFO who is taking over as CEO in July. He says he expects gearing to rise from 6 per cent at the start of the year to the “low 20s” by the end of the year. That is quite comfortable for a company of Shell’s size, he says, but it is still a very steep increase.

Update 2: A very interesting line from van der Veer: he has revealed that Shell does not plan any further investment in wind and solar power. Shell is focusing its renewables efforts on biofuels, where it is investing quite a lot in research into “second generation” fuels, so far without any commercial success.

Update 3: It is still a case of “jam tomorrow” from Shell, though: production is set to fall this year and quite possibly next year as well, although the company is promising annual average growth of 2-3 per cent a year over 2010-12.

A diversion: Van der Veer showed video of a 10m squid, found 2,000m down in the Gulf of Mexico, where Shell is drilling the Perdido field. It is quite an alarming sight.

Update 4: On Australia’s coal bed methane reserves, where Shell has made an investment but appears to be falling behind its smaller British competitor BG Group, there was a distinctly tepid response. Malcolm Brinded, the head of exploration and production, stressed the exciting potential of Shell’s other gas assets in Australia.

He added: “We avoided paying big dollars to enter at the peak of a heated market (for coal bed methane assets), and we feel very pleased with that position.”

Update 5: More on the US Department of Justice investigation, which Shell was first made aware of in 2007. “We have started an internal investigation,” says Mr Voser. He adds that the DoJ is “looking at payments done by Panalpina [a global freight forwarding company] to customs in Nigeria on our behalf.”

Update 6: Further clarification from van der Veer on the dividend: Shell expects to raise it by 5 per cent for the year as a whole.

That’s the lot for now. More coming later, including the results of a proper look at Shell’s annual report, available here.

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