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Shell to Focus on Liquids-Rich Assets, Leverage Gas

Royal Dutch Shell plc is joining its brethren in staking out liquids-rich shale development in North America while at the same time it works to leverage value from its extensive natural gas portfolio, executives said last week.

The European-based super major has 15 liquids-rich shale holdings globally, but most of the development spending this year is slated for the North American market, CEO Peter Voser told financial analysts Thursday.

"These are exciting themes for our industry, unlocking large resources positions using advanced drilling technologies," said Voser. "In liquids-rich shales, which is a relatively new play for Shell, we're looking into our existing licenses where can we produce oil from what the industry used to see as source rocks. This is very much a story of drilling up and commercializing the portfolio, building a long-lasting and profitable gas supply business, with interesting integration opportunities and building up liquids production."

Shell plans to "focus on large prospects in proven hydrocarbon plays, high-value near-field wells, resource plays like liquid-rich shales and tight gas, and make selective moves into frontier acreage positions with a higher risk-reward trend," the CEO said. "We expect to see attractive growth in upstream in the next few years. I look for financial growth here, not simply a game of chasing barrels."

Capital spending is set at $32-33 billion this year, slightly up from the $31.5 billion in 2011. Shell is hiking its "core" exploration spending by more than one-third "in the range of $5 billion and $6 billion per year on a worldwide basis over the next few years, including exploration, of which $3 billion to $5 billion could be North American gas plays." About $1 billion is to target liquids-rich shale development while $2 billion would be put toward exploration and appraisal.

The Eagle Ford Shale in South Texas is where "most of our liquid activity is today," said the CEO. Fourteen rigs are running in its 250,000-acre leasehold, which is weighted 60% to condensate-rich gas. "That's where we are focusing the activity this year."

Unconventional development also is underway in the Utica Shale of Ohio and in British Columbia, where Shell has several prospects in British Columbia, including the Duvernay Shale and the Groundbirch formation (see Shale Daily, Feb. 3). More acreage also is being eyed but with what it now has, the onshore portfolio "has the potential to reach some 250,000 boe/d in 2017," said CFO Simon Henry.

"We look for acreage in established plays and in frontier positions, where the subsurface is less well understood but the rewards are potentially very high," said Voser. "But the nature of exploration is changing, with onshore resources plays in tight gas and liquids-rich shales, which are driven by land acquisitions and drill-out, alongside more traditional offshore activities. We made a series of resources-based deals in 2011, including liquids-rich shales in several countries," and including adding more to its North American onshore portfolio.

"We used to drill wells and add resources; now we have this big onshore resource business," said Henry. "This year we will drill 20-25 key wells, maybe another 25 or so traditional type exploration wells, and 250 or so onshore. It's an order of magnitude bigger in terms of activities."

With low gas prices, Shell doesn't plan to put money money on exploration. However, it is keen on leveraging its North American gas into products more closely linked to oil prices. Shell is one of the world's leading integrated gas producers, with numerous liquefied natural gas (LNG) and gas-to-liquids (GTL) projects worldwide. It's a position that Voser doesn't plan to cede.

"We've delivered new projects in Qatar in 2011 and our LNG capacity now stands at 20 million tons/annum. The next tranche of LNG growth for Shell is coming from Australia, with 8 million tons/annum under construction, which is expected to lift our capacity by 40% to 2017. We've also made progress on LNG sales, with contracts for 6 million tons/annum of LNG sales signed in 2011, linked to oil markets and valued at $100 billion at today's prices. These are portfolio deals, and the gas isn't linked to any particular supply project."

In North America the company is progressing on LNG for export and transportation, as well as GTL and gas-to-chemicals products, said Henry. Locations for possible facilities in North America are under review, but at a cost of "$5 billion to $10 billion a project, we have to be selective."

However, there's no doubt that North America has become a key in Shell's portfolio. The company has stumbled in building its natural gas and oil production base since 2002. Production rose 5% year/year in 2010, but aside from the one year, output has fallen every year in the past decade.

Gas and oil production averaged 3.215 million boe/d in 2011, down 3% from 2010. However, U.S. gas output totaled 1.032 Bcf/d in 4Q2011, which was 11% higher than in the year-ago period and the highest production level for the year.

The company's "next tranche of growth" will be all about the upstream, said Voser. "I think if you look at Shell's growth profile in the last few years, the investment profile was really dominated by three large projects: Qatar 4 LNG, Pearl GTL and oilsands expansion. There is an important shift in our project flow now that these three are on stream, with 26 projects under construction, which will open up another wave of production growth."

Shell will be keeping a close eye on cost efficiencies, Henry told analysts.

"At current macro conditions, and even with higher net capital investment, we would expect to be in cash surplus this year, after dividend payment," said Henry. "However, the macro picture is very different today compared with the environment we envisaged in early 2010: higher oil prices and downstream and U.S. gas in a down cycle. So we are moving on from these 2012 targets, and setting a new outlook for the company today, reflecting these new realities."

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