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Shell Reshaping Conventional, Unconventional Businesses, Creating Integrated NatGas Unit

Royal Dutch Shell plc is revamping its upstream operations effective Jan. 1 by splitting the conventional and unconventional natural gas and oil resources units and creating a standalone business to trade and market natural gas worldwide.

The revamp was unveiled Tuesday by CEO Ben van Beurden during a management day webcast from London. A similar conference is scheduled for investors Wednesday in New York City. The expanded integrated gas division, which would combine global trading with liquefied natural gas (LNG) and gas-to-liquids businesses, is to become a "very significant" part of Shell as it is going forward, he said.

The "simpler" upstream operations would help to integrate UK-based BG Group plc, another natural gas-heavy, whose purchase is set to be finalized in early 2016.

"Integrated gas will be a standalone business in a move that reflects its enlarged scale and investment potential," van Beurden said. "By a number of measures, this is going to be a very material business."

Shell's current integrated gas unit has generated an average of $11 billion/year in cash flow over the past three years, versus $2 billion in 2009. The expanded division would be led by current chief, Executive Vice President Maarten Wetselaar.

The integrated gas division, once BG is part of the mix, would represent more than one-third of capital employed by the combined group. Depending on gas prices, the division's profits also would represent "well over" one-third of Shell's total earnings, van Beurden said.

Shell in July estimated the BG acquisition would add to cash flow with Brent crude oil at $67/bbl in 2016. Van Beurden said Tuesday the net asset value of crude price breakeven for the BG deal currently is estimated to be in the mid-$60s.

Shell already produces more gas than oil, and management has long forecast that gas eventually is to become the world's fuel of choice.

"Gas is of course already a key part of our business if you look at the amount of gas produced in overall mix -- 50%," van Beurden said. "Fortunately for integrated gas, you do not require much follow-on capital."

The commodity price environment has been upended, but most LNG projects, once they are running, have low unit cash costs, CFO Simon Henry said. The export projects "will all deliver cash at almost any conceivable oil price, though returns will depend on the absolute price at that time."

Trading gas on a global scale involves an intricate value chain that is more complex than traditional gas and oil sales, the CEO told investors.

"It is a slightly different business than upstream and downstream," because it requires "having connectivity, being able to trade around it and to manage the portfolio of contracts. There is a reason to give it more bespoke prominence in the business." About two-thirds of Shell's LNG portfolio already is linked to oil prices, with 10% to the spot market, he said last week during the conference call to discuss third quarter results (see Daily GPI,Oct. 29).

One of the priorities of the business overhaul is to capture "all of BG's magic," he said. BG's integration is expected to result in another $1 billion or 40% in pre-tax synergies to $3.5 billion. Those savings are necessary in a lower-for-longer price environment.

"Low oil prices are driving significant changes in our industry," van Beurden said. "I am determined that Shell will be at the forefront of that and emerge as a more focused and more competitive company as a result."

To that end, Marvin Odum, who now runs the Upstream Americas arm, is to lead a new Unconventional Resources business, which would span shale and heavy oil activities in North America. Odum is to oversee ongoing reviews of the portfolio and investment opportunities, as well as wind down Shell's activities offshore Alaska. Current Upstream International director Andrew Brown would manage the separated global conventional oil and gas businesses.

"We are reshaping the company and this will accelerate once this transaction is complete," van Beurden said. "Shell is becoming a company that is more focused on its core strengths, a company that is more resilient and competitive at all points in the oil price cycle and that has a more predictable project development pipeline. We'll grow to simplify."

Shell expects to recoup $11 billion in cost savings this year, including a 10% reduction in operating costs and 20% lower capital spending. Plans were reiterated to sell $50 billion in assets between 2014 and 2018. Exploration spending for the combined Shell-BG is forecast to be less than $3 billion in 2018, a 40% reduction from 2014 levels. The combined capital investment of the bigger company in 2016 is expected to be around $35 billion, which is slightly more than Shell planned to spend by itself this year.

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