Royal Dutch Shell is planning to cut 40% of its oil and gas production costs in a significant drive to save cash so it can focus more on power markets and renewable energy, Reuters reported, citing sources familiar with the matter. The review for the new cost-cutting measure, called Project Reshape, is expected to be completed by the end of 2020. It will involve Shell’s three business divisions and come in addition to the current cost-cutting measure announced in the wake of the COVID-19 pandemic.
In the upstream division, Shell aims at reducing spending on oil and gas production by 30% to 40%. The sources said that the Anglo-Dutch company would cut operating and capital expenditures on new projects. Shell will then focus on upstream production in a few key regions, including the North Sea, the Gulf of Mexico, and Nigeria.
Shell’s integrated gas division is also looking to cut costs significantly, the sources added. Meanwhile, in the downstream division, Shell will focus on reducing costs from its retail network consisting of about 45,000 service stations. According to the sources, the downstream division will play an essential role in Shell’s energy transition.
The three divisions are also seeking to cut costs and improve efficiency by laying off jobs and reducing management layers, the sources noted. Previously, CEO Van Beurden said that under the existing cost-cutting measures, the company is on track to save $3 billion to $4 billion by the end of March 2021. Separately, he noted that the travel ban had accelerated the company’s digitalisation. He also added that Shell had already deployed artificial intelligence to shorten maintenance time and minimise outages at its facilities. Shell is also divesting seven of its ten refineries.
The cost reduction is crucial for Shell to shift focus toward power markets and renewable energy which have relatively lower margins. At the same time, competition in the new sector is likely to intensify with established utilities and rivals such as Total, Eni, and BP fighting for market share. In 2019, Shell’s operating costs stood at $38 billion, while capital expenditure totalled $24 billion.
