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Shell Cutting Back But No 'Slash-and-Burn Mentality'

Royal Dutch Shell plc may cancel up to 40 projects over the next three years, worth an estimated $15 billion, including in North America, but it won't overreact to the contraction in oil prices by dumping projects without cause, CEO Ben van Beurden said Thursday.

Shell, the first of the world's Big Oil companies to report fourth quarter results, has begun an intense capital expenditure (capex) review of about 40 global projects, van Beurden said during a conference call.

"We are taking a prudent approach here, and we must be careful not to overreact to the recent fall in oil prices," van Beurden said. "The macro environment has moved against us," but while Shell is cutting costs, it plans to continue some big investments. "It's very important not to get into a slash-and-burn mentality."

The company hasn't shelved all of the projects. They've just been tabled until there's more clarity in the marketplace. If too many things are set aside, there won't be any growth when prices strengthen, the CEO explained.

For that reason, Shell hasn't cut spending from 2014 levels; it is to remain flat at around $35 billion. For instance, deepwater Gulf of Mexico (GOM) remains a priority, as does preparation for a possible $1 billion summer drilling program in Alaska's offshore. As well, out-of-pocket expenses continue for the joint venture to build a liquefied natural gas export (LNG) project on British Columbia's coast, which Shell is spearheading with Asian partners.

However, not a lot of money is earmarked for capital-intensive, low-margin opportunities, which include unconventionals in North America. In the onshore, spending is set to be reduced by about 20%. And anything that doesn't involve partners could be tabled, including the petrochemical complex in Pennsylvania's Marcellus Shale (see Daily GPIAug. 5, 2014).

"I believe the approach we set up in 2014 is working, and so I want to continue with this approach in 2015 and beyond," van Beurden said.

When van Beurden took the helm in early 2014 he began an cost-cutting program that included selling off a big chunk of the U.S. onshore portfolio (see Daily GPIMarch 13, 2014). The austerity program is here to stay.

"Capital efficiency is, of course, key in our industry," the CEO said. "We want to continue to invest in medium-term growth, while at the same time managing our affordability and improve our returns. We expect to reduce our spending for 2015 and this is forcing us to make some healthy choices in projects, setting high expectations for value from the supply chain.

"At the same time, Shell is retaining flexibility in both opportunistic, incremental plays, but we will further reduce capital spending" plans long-term until market conditions are better.

Shell isn't taking unconventional drilling off the table. It just isn't enthusiastic about drilling today in North America -- or anywhere.

"I think we made good progress in North America in restructuring in 2014...In recent years the company had taken up quite a bit of acreage and options in a number of countries around the world. But in many cases, we have seen pretty mixed well results and also a few above-ground issues," he said. "This, combined with capital ceilings, means we won't go forward with all of this portfolio."

The resources play spending, mostly centered in North America, is to be cut by $200 million, or 20% this year. "And we expect frankly to exit from quite a few positions," van Beurden said. "This will result in some impairments and some well writedowns that we still carry on the books." He did not identify what Shell may exit.

In North America's dry natural gas plays, Shell has a "strong" position in Canada's unconventionals, gas that would be used for the LNG export project, the CEO noted. Shell also has gas acreage in Appalachia, "where we are progressing some very interesting new discoveries in Utica. In the liquids-rich shales, we have retained Canada and the Permian acreage for further appraisal and development in the years to come...

"But North American resource plays remained at a loss of $1.2 billion in 2014."

Shell is "working hard to get a much more competitive cost structure," but the onshore doesn't match the long-term value of the GOM portfolio, van Beurden told analysts. One analyst questioned him about why Shell would budget more for expensive offshore projects during difficult price environments when the onshore might have a quicker payday.

"To some extent, it's impossible to compare the two," van Beurden said. "They are fundamentally different. In an unconventional position, yeah, one could say, you have a lower risk on investment, one well at a time, and maybe it's more predictable, but also, it's a smaller margin to play with. It's more flexible, more rateable, but it needs continuous capex injections to keep it going...We have four existing [onshore] assets on the balance sheet in North America, worth about $20 billion. How much more can they bring into productive use? We can play around with that a little bit..."

Meanwhile, the still-not-completed Appomattox project in the deepwater by itself is a $20 billion project "in one gulp," said the CEO (see Daily GPISept. 9, 2014April 29, 2011). "Therefore, you take a big swallow and prepare yourself to see that through. Once it's in operation, it's completely different. It has very, very high cash margin, very little to keep it in operation, and incredibly high productive yields compared to unconventionals...

"You have to have a little bit of both to match your profile. Unless you are a midsize E&P in the U.S., you cannot, just say, have an unconventional profile. You have to mix it. You have to understand how much to have in different buckets, when to bite off some, how much to nibble a bit...It's more than simple economics coming into it..."

North America's onshore is "a difficult area," van Beurden said. "But we are determined to stay, to get it right and to make it a strong business for our shareholders. But overall, resources plays are an area where we are continuing to dial down the spending because we can and we have to, to moderate our growth and implement our capital ceiling across the company."

Shell "will have to continue to challenge ourselves and everyone else that we have to be credible...and remain affordable," said van Beurden. "We must get the balance right with retaining a growth pipeline, and at the same time, policies if we have to reduce capital spending" further. This year appears to be a "transition year, ahead of the contribution of the next wave of contributions from 2016 and onwards."

On a current-cost-of-supplies basis, which factors out the impact of inventories and is similar to U.S. net profit, Shell earned $4.16 billion in 4Q2014, versus $2.15 billion in the year-ago period. For the full year, profit was $19.04 billion, up 14% year/year.

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