THE WALL STREET JOURNAL: Shell Sheds Refineries, Gas Stations: “Even after this year's headline-grabbing scandal over its oil reserves, most people still best know Anglo-Dutch oil company Royal Dutch/Shell Group by the scallop-shell logo”: “a lot fewer people will be seeing this iconic emblem in the future” (ShellNews.net)

Broad Plan Is Under Way

To Help Boost Profitability

Of Oil Products Division

By MARK LONG

DOW JONES NEWSWIRES

August 31, 2004

LONDON -- Even after this year's headline-grabbing scandal over its oil reserves, most people still best know Anglo-Dutch oil company Royal Dutch/Shell Group by the scallop-shell logo on its service stations and products.

But a lot fewer people will be seeing this iconic emblem in the future, as Shell rolls out a significant global purge of its refineries and gas stations.

Shell also is conducting an internal reorganization of those businesses as part of a broad plan -- dubbed OP-One -- to help boost profitability in the company's Oil Products division, according to people familiar with the plan.

During the past year, Shell has shed service stations and stakes in refineries stretching from Japan to Portugal to Peru. More sales are on the way, as the world's third-biggest oil company by sales -- after Exxon Mobil Corp., of the U.S., and the U.K.'s BP PLC -- gets serious about dumping assets where returns are too low and costs too high.

It is unclear exactly how much Shell -- whose corporate parents are Royal Dutch Petroleum Co., of the Hague, and London-based Shell Transport & Trading Co. -- has made on the sales so far. The company has divulged little on the terms of the asset disposals and declined to provide details.

Merrill Lynch recently said Shell has sold $3.6 billion, or about €3 billion, in assets so far this year, of which two-thirds were refining, marketing or chemicals assets.

"We estimate that a further $1.4 billion of [downstream] disposals are pending "and that those sales should be completed by the end of the third quarter, the investment bank said.

In conjunction with this asset-sale plan, Shell in May internally launched the OP-One restructuring plan, which follows a similar revamp of the company's bigger Exploration & Production division during the past couple of years.

"So, what is OP-One? It is our strategy for repositioning Oil Products to win back sustained downstream leadership," said Rob Routs, Oil Products chief executive officer, in an internal note detailing the program.

In global refining and retailing of fuel products, Shell is No. 2, having yielded the top spot when Exxon bought Mobil in 1999.

The Oil Products business primarily consists of crude-oil refining and retailing of fuel and lubricants products for cars, boats and airplanes. It typically accounts for about a fifth of Shell's full-year profit, which totaled nearly $12 billion in 2003. Underpinning the brand is one of the world's most recognizable logos -- the red and yellow scallop shell, in use since the early part of the past century.

But Shell's returns from its downstream business have disappointed the market. Mr. Routs, who took over from 40-year Shell veteran Paul Skinner as Oil Products chief last autumn, is determined to change that.

"We were outperformed by Exxon Mobil and Total last year on earnings per barrel, our [return on average capital employed] has languished well below shareholder expectations in recent years, and our organization is complex and costly," he said in the internal note. "We simply can't accept that."

Shell declined to provide numbers for those examples of underperformance or any downstream financial targets. However, Deutsche Bank analyst J.J. Traynor estimates Shell's capital return from its refining and retail businesses in 2003 was 10.6%, while Exxon Mobil had 14% and Total SA's was 17%.

The company will give a rundown of the downstream overhaul at an eagerly anticipated strategy presentation in London scheduled for Sept. 22, people close to the company said.

OP-One is scheduled to be implemented world-wide on Jan. 1. It will see downstream operations reorganized by business activity, the same people said.

Refineries and factories will fall under a new manufacturing aegis. Service stations will be contained in the retail division, and liquid petroleum gas, aviation fuel, marine fuel and other products will be overseen by a business-to-business division. The lubricants business was streamlined last year as a prototype for the divisional overhaul, these people said.

As the guts of Shell's downstream business are being reworked behind closed doors, more-visible changes have come this year in the form of the asset-disposal program. Since January, Shell has sold hundreds of service stations in Venezuela, Peru and Portugal, and has put its Spanish network on the block. Local reports say sweeping sales are planned for Chile, Argentina and Brazil.

Business daily El Cronista said Shell hopes to collect about $1 billion from the disposal of some 900 gas stations and a Buenos Aires refinery capable of processing 100,000 barrels daily.

Shell has so far declined to confirm these businesses are for sale, saying only that "Shell has an active portfolio-management program, including the downstream operations in Latin America."

More than 400 company service stations in Sweden also have been up for sale for more than a year, but have failed to find a buyer. Shell has found it equally tough to reduce its refining exposure in the oversupplied New Zealand and Australia markets.

But it has had success selling on refineries in Japan, Malaysia and Thailand.

In the U.S., where a massive overhaul of the downstream business has been under way for a couple of years, the company sold a Delaware refinery in May, and is in the midst of a contentious plan to shut down a 70,000-barrel-a-day refinery in California.

The U.S. downstream business has been the biggest drag on returns for Shell. Deutsche Bank's Mr. Traynor estimates its earnings per barrel of oil from U.S. downstream operations in 2003 was 72 cents, compared with $2 for Exxon Mobil. Shell's restructuring efforts in the U.S. have centered on downstream holding companies Equilon and Motiva, of which it gained control in late 2002 when partner Texaco pulled out.

Since then, Shell has sold or closed around 4,500 stations, and rebranded thousands of Texaco stations under the Shell logo.

ING Financial Markets analyst Jason Kenney estimates the company will lose 5% of its sales market share in the U.S., despite plans to sell or shut down about 30% of its retail operations there, underlining how much fat had built up in those businesses. It also has sold nearly $1 billion of pipeline assets in the U.S. this year.

Write to Mark Long at mark.long@dowjones.com