May 27, 2009 / 9:27 AM / in 8 years

Shell to restructure under new chief

<p>A sign for a Shell petrol station is seen in London October 28, 2008. REUTERS/Toby Melville</p>

LONDON (Reuters) - Royal Dutch Shell Plc‘sincoming Chief Executive Peter Voser plans to restructure the oil major’s operations to cut costs and avoid repeating past project delays and cost overruns, the group said on Wednesday.

Like a similar overhaul initiated at British rival BP two years ago, Shell’s plan takes its cue from industry leader Exxon Mobil’s famously rigid management culture but investors lamented the lack of explicit targets for cost savings.

Shell said its core exploration and production (E&P) business would be divided into a unit covering North and South America and another responsible for activities outside the Americas.

The new upstream divisions will also take responsibility for liquefied natural gas and power operations in their spheres. Gas and power was previously a separate unit under Linda Cook, who Shell said on Tuesday was stepping down.

The world’s second-largest non-government controlled oil company by market value will also create a new division to manage the design and construction of new upstream and downstream projects.

“Organizationally, we are too complex, and our culture is still too consensus-oriented. Our costs are simply too high,” Voser said in an email to staff, excerpts of which were seen by Reuters.

STANDARDISATION, SIMPLIFICAITON

In recent years, Shell has suffered big delays and cost overruns on major projects such as the $22 billion Sakhalin-2 project in Russia and the Pearl gas-to-liquids plant in Qatar.

The company hopes by following the approach of industry leader Exxon Mobil in having a separate unit responsible for new projects, it can cut costs and boost reliability.

BP’s Tony Hayward also followed Exxon’s example after he took over as CEO in 2007, ordering increased standardization in BP projects. The London-based oil major also merged its upstream and gas and power units.

Exxon is renowned within the industry for its strict management practices and insisting employees do not deviate from standard operating procedures. BP, on the other hand, had a risk-taking culture that allowed considerable freedom to managers of units or fields, and Shell had a culture of making decisions by consensus.

Investors and analysts reacted coolly to the new plan.

“I would have preferred to see some firm targets,” said Richard Champion, Head of UK Equities at Principal Investment Management, which holds Shell shares. “Maybe they will come.”

Shell’s London-listed “A” shares traded down 1.3 percent at 1,625 pence at 9:17 a.m. EDT, lagging a 0.3 percent rise in the DJ Stoxx European oil and gas sector index.

Jason Kenny, oil analyst at ING, said the plan was probably too late to boost Shell’s shares against rivals, who were already well advanced on cost cutting, in the face of a collapse in oil prices from over $147/barrel in July to $63/bbl now.

Kenny added in a research note: “Shell will likely be aiming at high $100 millions gains if not low $1 billions over the next two years or so.”

In 2008, Shell’s financial and operating performance ranked fourth among the five largest non-government controlled oil companies, according to its own measurements.

The company is also under scrutiny after shareholders, in an almost unprecedented move for owners of a publicly traded company, voted against the company’s remuneration policy last week.

As part of the overhaul, Malcolm Brinded, currently head of the global E&P business, the unit responsible for most of Shell’s profits, will lose his responsibility for North and South American upstream operations and for upstream project delivery outside the Americas.

However, Brinded will take charge of almost all of Shell’s liquefied natural gas operations as these are centered outside the Americas.

The project delays and cost overruns were likely key reasons Brinded failed to secure the top job at the Hague-based company, analysts said.

Voser takes over from current CEO Jeroen van der Veer in July.

Editing by David Holmes and Jon Loades-Carter

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