Falling oil and gas prices hit profits at European oil majors Royal Dutch Shell and Repsol  in the second quarter, prompting both to cut costs and scale back investments.

Shell said the industry was grappling with a combination of weak demand for energy, excess capacity, and high industry costs, with no early respite expected.

Net income excluding inventory adjustments plunged about two thirds at both companies, repeating a tale told earlier in the week by a string of energy companies including BP and ConocoPhillips, and reflecting the sharp drop in oil prices from their July 2008 peak of $147 a barrel.

Tighter refining margins also took a toll, helping knock 58 percent off net income at Finnish oil refiner Neste Oil.

The drops would have been worse, but for foreign exchange gains after the dollar strengthened, but even so, both companies outperformed analysts' expectations.

Shell chief executive Peter Voser, who took office earlier this month, gave a sombre outlook for energy demand and prices.

"We are not banking on a quick recovery," he said in a statement.

The Hague-based Shell, the world's second-largest non government-controlled oil company by market value, is aiming to tackle the tough environment by slashing costs.

It said it achieved $700 million in cost savings in the first half of the year compared with the same period in 2008. This excludes savings from the stronger dollar, which shaved another $2 billion off costs in the first half.

British rival BP said earlier this week it had saved $2 billion in the first half of the year, helped by currency gains.

Since July 1, Shell has cut 20 percent of senior management positions and said there would be "substantial further staff reductions". It also said its capital investment budget would fall 10 percent next year to $28 billion.

Analysts at Petercam said that shouldn't affect its production growth target of 2-3 percent between now and 2012. Repsol said it had put in place a "an extraordinary savings plan" that would slash over 10 percent of its planned 2009 spending.

Shell, Europe's largest listed company, said oil and gas production continued to fall, dropping 5.3 percent in the quarter compared to the same period of 2008.

Repsol enjoyed a 1 percent lift in output compared to the same period of 2008, which was depressed by an oil workers' strike in Argentina. - Reuters