Having dialed back on new project activity in 2007-2008 due to high costs, Royal Dutch Shell plc replaced 97% of production in 2008 on an organic basis while its business has migrated toward being weighted 50-50 natural gas vs. oil. Going forward, Shell executives said the company plans to leverage the global recession in seeking cost advantages while building reserves and infrastructure to take advantage of longer-term growth.

CEO Jeroen van der Veer said during a briefing with reporters last Tuesday that long-term oil and gas fundamentals remain positive, but the industry is facing a sharp downturn in energy prices at a time when costs are high by historical standards. “These are testing times in the oil and gas industry. Whilst short-term measures are important, we keep our long-term perspective, and continue to believe that energy needs over the long term provide a positive context for Shell’s investment programs today.”

The pause in investment gives Shell the opportunity to reduce supply chain costs as it launches new projects, the company said. Investments currently under way include:

The company said it will invest some $31-32 billion in 2009. “The economic slowdown creates opportunities for Shell to reduce supply chain costs, as spare capacity in the services industry comes into play. We don’t have a crystal ball on oil prices, so we are planning on the basis that the downturn could last more than a year,” Van der Veer said.

Natural gas will likely be playing a larger role in the company’s activities.

“Several years ago…we actually took a view that natural gas would become quite a preferred fuel globally and made some conscious decisions to increase, for example, the amount of exploration budgets we put toward gas projects compared to what we had been doing in the past,” said Linda Cook, head of the company’s gas and power unit. “It’s no surprise to us today that we are now close to 50-50 oil and gas in Shell. It was the result of conscious decision-making.

“Long-term we still believe that the outlook for natural gas demand is strong. Natural gas still remains the preferred fuel for power generation. As the undeveloped countries continue to mature their economies, they will need more electricity, and more and more they are leaning toward and choosing natural gas as their fuel of choice.” She added that restrictions on the emission of carbon dioxide (CO2) coming into play around the world will advantage gas-fired power generation.

“Of course, in the short term the combination of the economy and a relatively warm winter in some parts of the world has led to softening in the spot markets in natural gas,” Cook said.

However, she noted that most of Shell’s gas is sold in the world market rather than the United States, so it’s not as exposed to the spot market as the gas sold by some of the company’s competitors. “A lot of [Shell’s gas] is LNG, and most of that is tied to long-term contracts that are related to global oil prices and not the natural gas price in any particular market. So compared to some companies we have less exposure to spot natural gas prices.”

Exploration drilling in 2008 added about 1.2 billion bbl at a finding cost of $2-3/bbl. Business development activities added more than 1 billion bbl of resources in 2008, the company said. Organic reserves additions (including oilsands) for 2008 were 1.1 billion boe, compared to 1.2 billion boe of production, and reserves replacement was 95%. Organic reserves replacement, including oilsands and year-end price effects, was 97%.

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