Since Royal Dutch Shell announced its plan to buy BG Group in April for nearly $70 billion, the investors of both companies have watched the further erosion of the price of oil, worrying that the deal may no longer be viable.

After all, on Oct. 27 Shell reported losing $6.1 billion in the third quarter of 2015 because of $7.9 billion in charges it incurred by ending its exploration in the Arctic Ocean off Alaska and by suspending its work at Canada’s Carmon Creek oil sands program. And, like the entire oil industry, it’s been suffering from the low price of oil.

When Shell announced the BG merger on April 8, it also indicated that it would be able to afford the deal because it expected oil prices to recover to about $90 per barrel by 2020. Instead they’re now hovering around $50 per barrel today and aren’t expected to rise because of a combination of slowing demand, particularly in China, and increased production.

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In early April, the price of Brent crude was around $59 per barrel. Since then it’s been trading between the low $40s and $69 per barrel, leading many industry insiders, including Shell CEO Ben van Beurden and BP CEO Bob Dudley, to forecast that the cost of a barrel of oil will stay “lower for longer.”

That’s enough to make anyone nervous, so the Anglo-Dutch energy company is trying to assuage investor fears with a series of cost cuts. On Nov. 4 it said it would cut an additional $1 billion in spending, increasing its savings on the deal by 40 percent to $3.5 billion. Shell is also now selling $20 billion of its assets, and plans to sell $30 billion more in the two years after deal closes, likely in early 2016.

The company said the deal would be financially sound if oil rises slightly to the mid-$60s per barrel.

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Shell claims the deal would also increase its cash flow for paying dividends and debt, and would streamline operations so it can focus on oil production and refining as well as deepwater drilling and liquid natural gas (LNG) production.

“Although oil prices have fallen in 2015, the valuation case for the BG acquisition still looks compelling today for both sets of shareholders,” van Beurden said in a conference call with reporters.

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In a statement, van Beurden acknowledged that “low oil prices are driving significant changes in our industry,” but added, “We are reshaping the company, and this will accelerate once this [BG] transaction is complete.”

Brendan Warn, the managing director of energy research at BMO Capital Markets in Toronto, said he expects Shell’s cost-cutting will have a positive effect. “Shell’s commitment to operate at a lower oil environment and maintain share buyback may reduce some investors’ concerns,” he told Reuters.

The $50 billion in combined asset sales in the next three years should make a tangible difference in Shell’s financial standing, Warn said. "The BG deal will make Shell a far more profitable company beyond 2017,” he said, “but until then a lot of divestments and levers need to be pulled to cover the dividend.”

By Andy Tully of Oilprice.com

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