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Shell Creating Standalone Unconventional Resources Arm

Royal Dutch Shell plc announced a major revamp of its upstream business on Tuesday, which would separate operations into three businesses, including a new unconventional unit to oversee shale, tight natural gas/oil and oilsands exploration and development worldwide.

The Unconventional Resources arm would be created from the Upstream Americas and Upstream International businesses, CEO Ben van Beurden told investors during a management conference in London. A similar meeting is scheduled Wednesday in New York City.

Upstream International would oversee all conventional exploration and development, including offshore operations in the Gulf of Mexico. A standalone Integrated Gas unit would take over all of the marketing and trading activities, including for liquefied natural gas (LNG) and gas-to-liquids businesses. The makeover takes effect Jan. 1.

"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."

The upstream business is being reorganized "to increase accountability for performance, and to better align the organization with the company strategy. Asset sales and hard choices on capital spending, such as the recent announcements to cease exploration in Alaska and the development of Carmon Creek heavy oil in Canada, all underline the changes that are under way."

The "simpler" upstream operations would help to integrate the gas-heavy operations of UK-based BG Group plc, whose purchase is set to be finalized in early 2016, van Beurden said. LNG trading is to become a much bigger part of the combined company, which necessitates the overhaul of the company.

Currently, the Upstream Americas business oversees activities in North and South America, including exploration and production for conventional and unconventional properties offshore and onshore. Under the revamp, Unconventional Resources would no longer manage any conventional or offshore assets, nor would it manage the LNG or gas trading businesses. BP plc last year created a separate unit from only its Lower 48 onshore operations (see Shale DailyOct. 27Aug. 20, 2014).

Shell's unconventional operations are concentrated today across North America. It operates tight/shale resource activity in northeastern British Columbia's (BC) Groundbirch shale/tight silts gas; Deep Basin tight gas in West Central Alberta (AB) and BC; Fox Creek in the AB/BC Duvernay formation; AB Foothills sour gas assets; the Appalachian Basin's Marcellus/Utica shales; and the Permian Basin in Texas and New Mexico. Permian activity originally was focused on vertical drilling, but Shell today performs more unconventional drilling using horizontal wells and hydraulic fracturing.

In addition to its ongoing operations, Shell is exploring for unconventional resources in Central AB's Rocky Mountain House, Argentina's Vaca Muerta and in Central Colombia's Valle Medio Del Magdalena.

Marvin Odum, who now runs the Upstream Americas arm, is to lead the new Unconventional Resources business. He would 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 global conventional oil and gas businesses. The Integrated Gas unit would be managed by current chief, Executive Vice President Maarten Wetselaar.

"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. Once BG is part of the mix, the unit 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, he 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%," the CEO said. "Fortunately for integrated gas, you do not require much follow-on capital." One of the priorities of the business overhaul is to capture "all of BG's magic." Integrating BG's business 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.

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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