SHELL has set itself the target of cutting costs by $2.5bn (#1.51bn) year by 2001 in its five-year plans unveiled yesterday by chairman Mark Moody-Stuart.

The cost-cutting agenda, which has already begun, is designed to improve Shell's return on capital in a low oil price environment.

It has lately been perceived as falling behind its peers, particu-

larly BP, in this regard.

Moody-Stuart said the group would be ''clearing out the cupboard'' in its 1998 results in declaring exceptional charges, including write-downs, of $4.5bn (#2.7bn).

Shell has not ruled out joining the industry fashion for huge mergers but it is not a priority. There has been recent speculation that it might merge with Chevron of the US.

''We have looked at merger possibilities and will continue to look at such possibilities, and if the right opportunity arises we will act,'' Moody-Stuart told a presentation to oil industry analysts in London.

He added: ''We have a great deal of work to do in our own shop . . . we are large enough to be the leading company on our own without any merger.''

Shell has already taken action to cut costs in the UK through the closure of Shell-Mex House, its landmark London headquarters in London, and the transfer of many employees to Aberdeen.

The group has so far announced 4000 world-wide job losses out of a total workforce of 105,000.

Further losses are now planned, although the group is not saying where at this stage. However, it is believed the North Sea exploration and production (E&P) activities are not threatened. ''Shell is confident that is E&P sector remains a sound business even if oil prices do not recover quickly,'' the group stated.

All proposed E&P investments are expected to produce fully satisfactory returns at a Brent price of $14 per barrel and still meet minimum hurdle rates at $10. E&P unit operating costs are to be reduced by 24% to $2.5 per barrel by 2001.

Shell warned that investment programmes in its overall exploration and production activities would be cut if there was an extended period of oil price at $10 a barrel or less.

Moody-Stuart outlined more streamlining of management structures to replace the committee system so that decisions are made more rapidly and effectively.

''I will ensure we have the right people in place to deliver on our promises,'' he stated. ''If we identify obstacles in our system at any level they will be removed.''

This is believed to be a reference to senior executives in Shell's bastions in Europe which are considered to be the most resistant to change.

The group reckons the oil price ''could well'' remained at around $10 a barrel for the next year or so, though Shell would remain ''financially robust'' even if it did so.

Moody-Stuart said they could expect little help from the business environment.

Shell is assuming that Brent crude will average $14 over the next five years, with global economic growth at 2% at best, while chemical margins will fall further in the short-term.

Shell is projecting oil and gas production up 10% and 25% respectively by 2001, but two-fifths of the chemicals portfolio is to be divested.

The shares were little moved by the statement but analysts were generally positive as they felt the groups management really meant business, with an increasing emphasis on shareholder value.

The shares fell 3.25p to 350.25p in London yesterday.

The goal is to achieve 14% return on capital employed by 2001, from the present depressed 9.2%.

The group said it would consider share buy-backs in years ahead and stressed that it had not changed its dividend policy.

Noting they had had to take ''tough choices'' Moody-Stuart said: ''Although we have made some very big cuts, with an $11bn (#6.62bn) global spending programme we still have plenty of room for growth . . . and remain ahead of the competition.''