With Royal Dutch Shell's earnings in free-fall during the last three months of 2009, the oil major is selling some refineries and shifting some spending to the upstream to prepare for a longer-term focus on natural gas, CEO Peter Voser said Thursday.
The European-based reported 4Q2009 profits fell 75% from the prior year period to $9.8 billion from $31.4 billion. Weak global demand and high inventory levels led to a "challenging" environment for the refinery unit and rising oil prices failed to overcome the losses -- similar to the stories told earlier this week by rivals BP plc and ExxonMobil Corp.
Natural gas is expected to make up more than half of Shell's production by 2012, Voser said during a conference call. "Its potential role is underestimated," and demand for gas is expected to grow.
But first the producer has to deal with its refinery losses -- and a precarious outlook for 2010.
"Our fourth quarter 2009 results were impacted by the weak global economy," Voser said. "Oil prices have increased compared to a year ago, but gas prices and refining margins have declined sharply because of weaker demand and high industry inventory levels. We are not assuming that there will be a quick recovery, and the outlook for 2010 is uncertain.
"Our strategy is on track, although the near-term industry outlook does remain challenging. We are taking steps to improve our performance, to bridge the company, and our shareholders, into a period of significant growth in the coming years."
Among other things Shell will shed an additional 1,000 jobs this year, adding to the 5,000 job losses announced in 2009 (see NGI, Aug. 3, 2009). Most of the job cuts will be from downstream operations.
"As a result of our actions in 2009, some 5,000 employees will leave Shell, a reduction of 10% in the impacted areas," said Voser. "We have reduced underlying operating costs by some $1 billion in the fourth quarter 2009, and by over $2 billion in 2009 compared to 2008."
The CEO admitted that the downstream business "is facing some tough times. There is a significant overhang of industry refining capacity, exacerbated by the economic downturn. That's why we have initiatives under way to refocus Shell's downstream footprint into fewer, more profitable markets with growth potential, through disposals and selective growth investment." Up to 15% of Shell's refineries are to be sold if the price is right, he said.
Despite the downstream challenges facing Shell, Voser reported gains in the company's portfolio last year, including final investment decisions on two new projects: the Gorgon liquefied natural gas (LNG) project in Australia; and the Caesar Tonga development in the deepwater Gulf of Mexico (see NGI, April 6, 2009). Shell also launched a front-end engineering and design study for a floating LNG facility for the Prelude gas field in Australia.
"Exploration and appraisal performance in 2009 has been strong, with particularly good results in North America tight gas and Western Australia gas," said Voser. "I see exciting opportunities for the medium-term." Shell is seeing "particularly strong results from exploration and appraisal drilling in the North American Haynesville [shale] and Groundbirch tight gas areas."
The Groundbirch gas project, which is in the Montney trend in northeastern British Columbia, was added to Shell's portfolio in mid-2008 when the producer bought Duvernay Oil Corp. (see NGI, July 21, 2008).
"The strategic view on gas growth for the long-term hasn't changed," said the CEO. "We see that fossil fuel actually growing, and we'll making investments in that...Our strategy hasn't been changed by a more difficult few quarters. We are keeping our long-term view."
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