Royal Dutch/Shell Group’s new Chairman Phil Watts, who assumed the post at the world’s second largest energy company July 1, said the company’s production goals through the rest of 2001 will be met, but admitted that its future expansion could slow because of the sagging world economy. Watts, who inherited a company that has been knocked back in several takeover attempts recently, nonetheless noted recently that natural gas “is plainly the fuel of the future and we are well placed to be part of that future.”

During press conferences in London and The Hague, Watts, who chairs the Shell Transport and Trading Co. p.l.c., and Jeroen van der Veer, president of Royal Dutch Petroleum Co., announced that adjusted second quarter net income was up 12% to $3.6 billion, compared with $3.2 billion for second quarter 2000. Watts said the major growth came from gas production “notably in the USA and growth in the liquefied natural gas (LNG) business,” which combined is 11% higher than the same period in 2000. However, overall oil and gas production only rose a combined 1% in the quarter, less than expected by analysts. Net income was down from second quarter 2000 almost 9%, the first time in almost 18 months that Shell has missed record earnings.

Watts said the company planned to increase its oil and gas supplies by 5% a year, but admitted it would be an effort. “The rate of production growth is clearly going to be a challenge,” said Watts. “We do expect to be around the targeted level for this year, but the economic outlook is uncertain and is affecting medium-term demand growth for gas, which could delay some of our projects.” The U.S. economy is growing at its slowest rate in eight years, and it uses about 25% of the world’s oil.

Along with playing a “major role” in developing Saudi Arabia’s natural gas industry, Watts said that a Far East project in Sakhalin was “going well,” and added that “we are developing new markets for liquefied natural gas (LNG), a key part of our growing gas and power business, which had a record quarter.” Watts also noted that the Fletcher Challenge acquisition (see NGI, May 12) had improved overall gas production.

Calling the second quarter of this year a “vintage quarter” for discoveries, he reported the company had made a significant deepwater oil find near the Bonga field offshore Nigeria, but noted that the rate of production growth would “clearly” be a challenge. All of the company’s growth is tied to a “background of continued delivery on promises” to ensure capital discipline, portfolio management, cost leadership and personal accountability.

“Nobody can be in any doubt now that we meant what we said when we spelled out those drivers of profitability,” said Watts. He said that the return on average capital employed (ROACE) is more than 21%, and “it is clear that they are embedded in the way we run our businesses.”

Earnings from exploration and production remained flat at more than $2 billion in the quarter, but Watts noted that the company’s chemical earnings were “halved in very tough trading conditions.” Still, LNG supplies helped boost profit in the gas and power unit 59% to a record $390 million. The gas and power unit also produces electricity.

While mega rivals like BP and Exxon have shored up their production and earnings through mergers and acquisitions, Shell cut its chemical assets and reduced costs to boost profits. It failed in two takeover bids this year alone, both geared to boost its natural gas assets. Shell lost out to Williams in its attempt to buy Denver-based gas producer Barrett Resources Corp. (see NGI, March 12; May 14), and in April, the Australian government blocked the oil giant’s $5.1 billion unsolicited bid for Woodside Petroleum Ltd., citing its concerns about “national interest.” Watts noted, however, that the company remains optimistic.

“The fact that Shell is cash-rich today…it’s not burning a hole in my pocket,” Watts said. “We are looking for opportunities, but we’re not about to pay too much.”

Watts also inherited the ongoing talks with Texaco Inc. to buy its stake in Equilon Enterprises LLC and Motiva Enterprises LLC, two U.S.-based refining and marketing ventures. Texaco and Chevron Corp. expect to sell the assets so that Chevron can complete its merger with Texaco. Although the talks between Shell and Texaco have been progressing for almost nine months, Shell’s Paul Skinner, who runs the Oil Products division, said the talks were “constructive,” and remains optimistic of a “timely” agreement.

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