Royal Dutch Shell's third-quarter earnings were lower than we expected, with negative comparisons to both year-ago and second-quarter results. Earnings of $3.25 billion were 62% below the $8.45 billion earned a year ago and also below the $3.82 billion earned in the second quarter. Upstream earnings of $1.5 billion were below year-ago and second-quarter earnings, while downstream earnings of $1.3 billion improved on a quarter-to-quarter basis. CEO Peter Voser cautioned not to expect a quick recovery, prompting the firm to cut costs and staff by 5,000 as part of its efforts to simplify company structure. New projects may be encouraging, but we'll keep a close eye on Shell's progress in cutting costs and boosting operating efficiency.
Lower-than-year-ago oil and gas prices were the primary factor behind Shell's drop in upstream earnings. Production was flat as new field startups and expansions, including Shell's Sakhalin II project in Russia, were just enough to offset field declines. During the quarter, Shell added to its long-term project portfolio by participating in the offshore Vito oil discovery in Gulf of Mexico and the Achilles gas discovery in Australia. The firm is launching its global-scale Gorgon project in Australia to deliver liquefied natural gas through 2050.
Shell's downstream segment remains pressured by lower global demand for refined products. Lower year-over-year refining margins were caused by lower margins at the refining, marketing, and chemical businesses, which offset benefits of lower oil feedstock costs. As part of efforts to concentrate its downstream operations, the firm earmarked 15% of refining capacity, or 600,000 barrels per day, for possible disposal or conversion to oil terminals. We're encouraged by Shell's efforts to reshape its downstream portfolio and will monitor its progress with planned assets sales.
Catharina Milostan is a Morningstar stock analyst.