Those results proved a tough act to follow for Shell, as it beat earnings
expectations by a more modest margin.

However, the differences between the two companies could be of benefit to
Shell in the future.

Cost programme
Both companies are involved in large-scale cost-cutting programmes. While BP
has impressed with $4bn of savings and a 6,500 reduction in headcount, Shell
is focusing on $1bn of savings and 5,000 job cuts.

While BP is nearing the end of its savings programme, Shell, however, is yet
to realise some of the results of big cost reductions. Shell is widely
regarded as the European oil major with the most cumbersome structure.

To address this, Peter Voser, chief executive, launched a restructuring
programme, "Transition 2009", when he took the reins in July. Mr
Voser, whose background is in finance – in contrast to most other oil major
chiefs who rose from engineering or geological roles – faces a significant
challenge.

The company is tight-lipped on how much more it plans to save. But Simon
Henry, chief financial officer, pointed out that the savings reported so far
exclude the headcount reductions - which will lead the company to book
several hundred million dollars later this year before showing savings.

"Previously we've said we would expect several billion a year to be
possible, both from Transition 2009 and savings on the supply chain,"
he says.

"We've saved $1bn from first nine months of this year and Transition
[2009] hasn't really kicked in yet. In fact that's mostly from the
downstream [business]."

New reserves
Reining in costs is only part of the challenge. Along with its peers, Shell
faces the twin pressures of maintaining a large dividend and increasing
production of oil and gas at a time when new reserves are becoming
increasingly difficult to find and produce.

This is a particularly important issue for Shell as its reserve replacement
levels have been falling for years and the company has only recently begun
to recover from a reserves reporting scandal.

Yesterday's results suggested the production problem is already beginning to
turn round; it reported a small increase in overall oil and gas production,
although oil alone fell.

Shell says its underlying production improved by 180,000 barrels per day -
more than enough to offset its annual decline rate of 5 per cent.

"Flat production year-on-year is a better performance that we've seen for
the past five quarters," says Gordon Gray, an analyst at Collins
Stewart.

The bigger question for Shell is whether it is positioning itself correctly
for longer production growth and - crucially - for the right kind of
production.

Shell is making substantial efforts on numerous developments. Some of its
highest profile projects are the Canadian oil sands, the Pearl
gas-to-liquids project in Qatar and Perdido, a deepwater project in the Gulf
of Mexico. Its production will increase by 1m barrels of oil equivalent per
day in 2012 - more than a third of its current levels.

Further ahead, a 25 per cent stake in the giant Australian Gorgon LNG project
is due to begin producing in 2014. But those efforts are expensive. To reach
its goal, Shell is on track to spend about $32bn on capital investments this
year. Next year that number will fall by about 10 per cent, the company
says. But it is much higher than its peers: Exxon, widely viewed in the
industry as the benchmark for production efficiency, announced yesterday it
had spent $19bn on finding new oil supplies so far this year. But BP's 2009
capital expenditure levels of about $14.4bn are also well below Shell's
$32bn.

Lower margin
The heart of any oil company's business is finding new supplies of oil and
gas, and producing them at a competitive margin. Mr Henry told investors
yesterday that Shell's existing Canadian oil sands output was profitable,
thanks to the price rises during the quarter. But he was also bearish about
the outlook for the oil price, saying that the current level of about $80 a
barrel was not justified by fundamentals.

"There is this gap, or lag, between heavy investment today and seeing the
impact of that on cash generation and earnings. It may be a temporary thing,"
says Andrew Whittock, analyst at Oriel Securities. But Mr Whittock warned
that unconventional oil and gas projects that Shell is investing in can be
lower margin.

"So the risk is that if the oil price or gas price slips back, their
margin gets squeezed to inadequate levels quite quickly."

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