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He's Brave Enough To Take Up Shell


July 20 will be a big day for the world's third-largest oil company, Royal Dutch/Shell Group (RD) -- and for global equity markets. That's when the British and Dutch wings will be merged into a single entity called Royal Dutch Shell PLC, headquartered in the Hague but incorporated in Britain. Shareholders have been clamoring for the change for years, complaining that the company's clunky Anglo/Dutch dual structure, with two chairmen and two executive committees, had made important moves such as major acquisitions just about impossible.

The man who finally had the courage to shake up Shell is Jeroen van der Veer, a bookish engineer who was looked on as a caretaker when he took over from the ousted Philip Watts in March, 2004. Instead, he is making some of the biggest changes Shell has seen in its 98-year history. In addition to streamlining the corporate structure, van der Veer is hustling to fix Shell's vital exploration arm. He has jacked up exploration spending to $1.5 billion per year, the highest in the industry according to Edinburgh consultants Wood Mackenzie. An additional $10.5 billion is going into production. He's on the hunt for new reserves and has already landed some big deals for exploration rights in Libya and western Australia.

Van der Veer took the helm when Shell was under fire from the U.S. Securities & Exchange Commission and others for overstating reserves. But the new CEO, who once ran Shell Chemical Co. in the U.S., knew the problems went far deeper. "When I look back at the last 10 years I find we have lost some strengths, and I will give 100% of myself to get those strengths back," van der Veer, 57, said in an interview in his Spartan London office on July 5.

One priority is speeding up the overly analytical culture, which makes it difficult for the company to land big deals. Van der Veer is planning to send executives to two new internal academies. One will sharpen their acumen at cutting deals with OPEC countries and other major oil producers. The other will train them in managing the giant, multibillion-dollar efforts that he believes are the future of major oil companies. Shell already has several of these "mammoths" under way, including the $5.3 billion Sakhalin Island gas project in Russia and the deepwater Bonga project off Nigeria.

PLENTY OF CASH

If van der Veer gets things right -- and that's a big if -- Shell's still considerable strengths could come back to the fore. It is the global leader in liquefied natural gas (LNG), one of the fastest-growing fuels today, and recently acquired promising exploration acreage in newly opened Libya, which will be used to feed an LNG plant there. It's also a huge player in gas-rich Qatar in both LNG and gas-to-liquids, another promising technology. Credit Suisse First Boston (CSR) estimates that Shell will earn an impressive $20.7 billion in net income this year, which gives it plenty of cash to plow into exploration.

But it can take years before exploration efforts turn into profits. Partly because of underinvestment in the late 1990s, Shell's production growth is likely to trail rivals such as BP PLC (BP), where it's rising at about 4% per annum. Shell estimates that its production will grow slightly until 2009. But as big projects kick in, output could grow from between 3.8 million and 4 million barrels per day in 2009 to between 4.5 million and 5 million by 2014.

Shell has another advantage. According to Morgan Stanley (MWD) about 1.3 million bbl per day of Shell's current production come from so-called legacy assets, which produce on a long plateau that requires limited further investment once they're on stream. That number will rise to more than 2.5 million by 2013.

Acquisitions are another possibility. Making it easier to use shares for takeovers is a key reason for restructuring Shell. At today's prices major deals don't make sense. But if something comes up, this Dutchman is ready.

By Stanley Reed in London


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