By MATTHEW CURTIN
If BP has moved up a gear in becoming a leaner, faster-growing integrated oil company, then Shell is having trouble with the stick shift. There is nothing the Anglo-Dutch company can do about weak gas prices and slack gas demand. But combined with stable exploration and production costs and flat output, its upstream operations disappointed in the third quarter. Shell’s earnings fell 62% compared with 34% at BP, which raised its cost-savings target by $1 billion for the year.

Even allowing for the political instability crimping Shell’s Nigeria operations and other maintenance work that pegged back third-quarter output, the company’s turnaround does seem perennially around the corner. A gloomy outlook on the world economy and the likelihood Shell will freeze the dividend next year don’t help. Shell’s share price fell nearly 3% whereas BP’s stock is up nearly 3% since its announcement Tuesday.

Yet Shell’s $3.5 billion in cost reductions so far this year don’t compare that badly with the $4 billion promised for the year at BP. So, Shell can still feel a little hard done by with the market’s reaction despite inevitable impatience among investors. The company is only starting to lick its upstream business into shape.

Add the multibillion-dollar additional savings CEO Peter Voser says he can extract to Shell’s relatively high exposure to indexed gas prices and what should be a rapid ramp-up in production in 2011 and 2012, and Shell’s turnaround potential is considerable. Its giant Russian Sakhalin gas project reached peak output for this first time this month. Only BG Group has higher forecast production from sanctioned development projects among the big international oil groups over the next decade, according to Credit Suisse. That’s before Chevron gave the go-ahead last month to its giant Gorgon liquefied natural gas project in Australia in which Shell has a 25% stake.

For those confident Mr. Voser is the person to finally turn Shell around, more of this potential should be reflected in its market valuation. The stock trades at 9.9 times 2010 earnings, a discount to BP, Chevron, and ExxonMobil.

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