Shell's $1 Billion Slash and Sell Game Promises Plenty of Short-Term Pain

Royal Dutch Shell is engaged in a game of catch up with its rival oil companies. It doesn't really matter what area -- just pick one. Shell is simultaneously pouring money into new projects in hopes of boosting its oil and gas production, which has been in decline for seven years; slash jobs and reduce costs to catch up with other more streamlined companies; and shrink its refining and marketing business.

In the long-term, if Shell really does boost production, all the slashing will be worth it. But the short-term outlook for the company is about as rosy and chipper as CEO Peter Voser's demeanor today during its fourth-quarter earnings call. Voser dished out more "catch up" plans for 2010, much of it focused on cutting at least 1,000 more jobs, reducing costs by another $1 billion and selling off 15 percent of its refining capacity. Last year, Voser steered the company through $2 billion in cost reductions and 5,000 job cuts, most of which were in senior management.

Voser described -- in a downright dour tone -- a difficult and uncertain road for 2010 due in large part to continued troubles in the refining industry. As Voser put it, after talking about the company's downright dismal fourth-quarter earnings: "This is the toughest refining market I've seen in 25 years."

Shell's fourth-quarter earnings fell 75 percent to $1.18 billion. Shell's downstream business, which is the refining and marketing of fuel, took the biggest hit. Shell's downstream lost $1.76 billion in the fourth quarter compared with a profit of $561 million in the same quarter the year before.

Shell isn't exactly alone. Virtually every other integrated oil company and U.S. refiner is suffering because of a perfect storm of weak demand, rising oil prices and a glut of supply. The result has been an increasingly small amount of money earned from turning crude into gasoline, diesel and other "refined" products.

But companies like ExxonMobil, which has already sold its interest in 10 refineriesincluding Ingolstadt in 2007 and its Okinawa-based refinery in 2008 to Brazil's Petrobras, is ahead in this most recent refinery slimdown. BP also has sold off two European refineries, its commodity chemicals business and its last U.K refinery, the WSJ noted. In short, Shell's portfolio is heavy.

And here's another problem: a lot of other companies are trying to offload their refining businesses too. Chevron, ConocoPhillips and Valero Energy are all selling off refineries. Chevron announced recently plans to restructure its downstream business, including selling some refinery assets, cutting jobs and exiting some markets.