Shell drills into supply chain to slash costs

3 February 2015

Shell is aiming to slash millions of pounds from its supply chain costs as part of plans to deal with the downturn in the oil market.

Announcing financial results for the fourth quarter of 2014, chief executive Ben van Beurden said the oil and gas company would cut capital spend by $15 billion (£10 billion) from 2015 to 2017, have a more concentrated number of projects to take forward, and cut costs.

He said that lower oil prices and affordability constraints had helped “sharpen our minds” and that there was a “multi-billion costs opportunity” for the company to work on its $60 billion annual contracting and procurement budget. He added the company would be setting higher expectations for value from the supply chain.

Shell’s fourth quarter earnings on a current cost of supplies basis for 2014 were $4.2 billion (£2.8 billion) compared with $2.2 (£1.47 billion) for the same period the previous year. Full year earnings on the same basis were $19 billion (£12.7 billion) compared with $16.7 billion (£11.1 billion) in 2013.

Van Beurden said the company was taking a prudent approach and would be careful not to overreact to the recent fall in oil prices.

“There are cost reduction programmes in place across Shell, looking not only at our own costs, but also in the supply chain,” he said. “These programmes are balanced against the different strategic activities in the company, we’re not chasing costs for costs’ sake, and we are careful to make sure none of this compromises safety.

“We are planning to put Shell’s operating costs on a downwards trajectory here, with opex in 2015 expected to be lower than 2014 levels.”

ConocoPhillips has also announced it would cut its capital expenditure to $11.5 billion (£7.7bn) this year, compared to the $13.5 billion (£9bn) it had previously announced it would spend, in anticipation of weak 2015 commodity prices. Chief executive Ryan Lance also said that it was “aggressively pursuing supply chain and self-help cost reductions”.

The company reported a fourth-quarter 2014 net loss of $39 million (£26 million) compared with fourth-quarter 2013 earnings of $2.5 billion (£1.7 billion). The company said it would provide more guidance on 2015 expenses and costs in April.

BP is also planning to spend $4 to $6 billion (£2.6 to £3.9 billion) less than previously anticipated in 2015. “Our focus must now be on resetting BP: managing and rebalancing our capital programme and cost base for the new reality of lower prices while always maintaining safe, reliable and efficient operations," said chief executive Bob Dudley.

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