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Shell Records $7.9B in Charges, Pulls Back Across North America

Royal Dutch Shell plc recorded $7.9 billion in charges for the third quarter after writing off $2.6 billion in abandonment costs for its Alaska offshore venture, $2 billion to cease plans for an oilsands project in Canada and $2.7 billion for the value of its global natural gas and oil portfolio. If and when prices rise, the United States is not at the "top of our list..to immediately spend more money on," the CFO said.

The Big Oil producer, one of the largest operators in North America, has scrapped and will continue to halt projects that don't make economic sense or meet a breakeven of $60/bbl oil price, CEO Ben van Beurden said during a conference call Thursday. He also hedged on when Shell will make a final investment decision on a proposed liquefied natural gas (LNG) export project that would carry gas from the west coast of British Columbia to Asian markets.

"While our cash flow and our operating performance in the quarter were strong, the headline numbers we're reporting...include substantial charges," van Beurden said. "These charges reflect both a lower oil and gas price outlook, and the firm steps we are taking to review and reduce Shell's longer-term option set. We have halted exploration activities offshore Alaska, and stopped the construction of the Carmon Creek in-situ oil project in Canada.

"These are difficult but impactful decisions. I am determined that Shell will become a more focused and competitive company as a result," said van Beurden, who took the helm last year with a mandate to turn things around (see Daily GPIJan. 17, 2014). Despite the downturn, Shell remains keen on its mega-merger with UK-based BG Group plc, "on track for completion in early 2016," as "a springboard to focus Shell into fewer and more profitable themes, especially deepwater and integrated gas."

CFO Simon Henry, who joined van Beurden on the conference call, was pessimistic when asked about Shell's U.S. plans going forward.

"We've reduced investments below $3 billion," Henry said when asked where domestic activity stood. "It's about $2.5 billion at the moment." Shell plans to continue to pursue some onshore projects, led by the Permian Basin, with activity as well in Appalachia and Western Canada's Duvernay and Groundbirch regions.

"If the oil price stays where it is, we will benefit" because Shell is "taking out costs almost on a daily basis at the wellhead...We are pretty competitive today...on getting molecules to market. But the cost away from there is something that we are still working to take down." Henry cautioned that even if prices were to increase, the United States isn't going to be a first mover for money.

"If oil and gas prices were to recover, the United States is not at the top of our list...to immediately spend more money on."

Decision in 2016 on LNG Canada

Van Beurden hesitated when asked about the progress on the LNG Canada project led by Shell, already undergoing front-end engineering design (FEED), a question he has dodged in the past (see Daily GPIMarch 13, 2014). LNG Canada is one of several by the industry proposed to export gas to Asia Pacific markets (see Daily GPIJuly 8). He preceded his answer with a long discussion about how Shell views future projects.

“The reality is, we manage the company differently today. If you look at the fundamentals of oil and gas, the industry will not invest trillions of dollars into projects if it can't make a profit...The reality is, of course, is that we don't know when this process plays out, how it plays out, at what level it stabilizes and whether or not there will some remaining volatility as a result of all of this.

"So, the way we are looking at projects now is...how can we make sure all our projects we are considering are resilient, are completely competitive in their class to a point that we are clearly ahead of the rest? Because in the end, the industry needs to exist, it needs to make a profit and we want to be ahead of the curve, so to speak."

The company also has to "live within our means...at today's oil and gas prices," he said. "And that is what we are doing, at $60, where the oil price has been on average over the last 12 months. That's how we manage the business, and that's also how we want to talk about managing the business going forward."

Shell now has a "more conservative outlook" on prices for the future. "What does that mean for LNG Canada? It is already in FEED, but if you look at gas prices in North America, you can imagine a downward adjustment is actually going to improve the economics of a project that fundamentally takes a margin between U.S. gas prices and North Asian gas prices. But at the same time, that's not the only driver...

"This project needs to be ahead of the pack; it needs to deliver the most competitive LNG into the target market. And we need to understand how resilient that is to the volatility that we no doubt will continue to see in oil and gas markets on both sides of the Pacific." The decision whether to move forward "will come up later" in 2016. "I'll leave it at that."

The decline in commodity prices was reflected in the current cost of supplies (CCS) figure, an accounting method that mirrors U.S. net income. The quarterly loss on a CCS basis was $6.1 billion (minus $1.94/share), versus profits a year ago of $5.3 billion. After stripping out the one-time impairments and writeoffs, profits totaled $1.8 billion (28 cents/share), 70% lower than year-ago earnings of $5.8 billion.

Operating cash flow remained strong at $11.2 billion from $12.8 billion. However, revenue crashed, falling to $68.7 billion in 3Q2015 from $107.9 billion. However, management said the quarterly dividend would be maintained at 47 cents/share.

Worldwide Production Up on Current Assets

During 3Q2015, total global gas and oil production fell year/year by 3% to 2.99 million boe/d. Excluding impacts from sales and curtailments, production jumped worldwide by 9%. LNG sales volumes fell to 5.3 million metric tons from 6.2 million metric tons.

Total U.S. production in 3Q2015 was 436,000 boe/d, slightly higher than year-ago output of 431,000 boe/d. Domestic natural gas production available for sale in 3Q2015 declined to 774 MMcf/d from 994 MMcf/d.

Shell's U.S. gas output has fallen steadily in the last five years, reporting 1.153 Bcf/d in 2010, 967 MMcf/d in 2011, 1.067 MMcf/d in 2012 and 1.081 Bcf/d in 2013. Last year domestic production was 1.055 Bcf/d in 1Q2014 and 994 MMcf/d in 2Q2014. U.S. liquids production was higher year/year at 303,000 b/d from 272,000 b/d.

Canadian gas production in 3Q2015 increased to 629 MMcf/d from 566 MMcf/d in 3Q2014 but was down from 655 MMcf/d in 2Q2014. Liquids output climbed to 197,000 b/d from 183,000 b/d.

Shell's global upstream unit reported a $425 million loss in 3Q2015, compared with profits of $4.3 billion a year ago. Global integrated natural gas earnings fell to $9 million from $2.58 billion. Capital spending worldwide totaled $5.22 billion versus year-ago spending of $6.47 billion.

Shell's decision to drop major projects around the world reflects the challenges the entire industry faces going forward -- and the probable decline in reserves growth down the line.

One bright spot was in the marketing/refining business, reflecting the benefit of an integrated business model. Downstream profits were up 55% year/year to $2.48 billion because of solid refining margins.

"Shell's integrated business and our performance drive are helping to mitigate the impact of low oil prices on the bottom line, in what is a difficult environment for the industry today," van Beurden said. "We continue to improve the operational performance of our assets, and production volumes are up. Costs are falling across the company and Shell's performance drive is delivering at the bottom line."

Alaska, Canadian Oil Sands on Hold

The CEO confirmed that exploration activity offshore Alaska would be halted "for the foreseeable future," but Shell is going to fight to keep its leases, despite a dry hole at its touted Burger prospect in the Chukchi Sea (see Daily GPI,  Sept. 28). Shell is the biggest leaseholder offshore Alaska. The U.S. Department of Interior rejected a bid to extend the leases in the Beaufort and Chukchi seas, which otherwise would expire between 2017 and 2020 (see Daily GPIOct. 19).

Shell is "considering our options in order to protect the remaining value of our assets and leases," van Beurden said. Burger was expected to anchor a big Arctic development, and while it "turned out to be uneconomic, there are of course other potential prospects in Shell's Chukchi leasehold, as well as other areas offshore Alaska."

Holding the leases would come with a hefty price tag as operators pay escalating annual renewal costs, which could be $40 million-plus a year between 2016 and 2020. Because "Burger is condemned in terms of its prospectivity, it actually makes the entire play a whole lot more challenging," van Beurden said. "We have other leaseholds, but they would depend on the critical mass of a central hub," which was to have been a discovery at Burger.

Long-term projects in the deepwater Gulf of Mexico (GOM) remain on track, with Shell advancing the Appomattox development, in which it holds a 79% stake. The Appomattox platform would be Shell's seventh four-column host in the GOM, initially producing from the Appomattox and Vicksburg fields, with average peak production estimated to reach 175,000 boe/d.

Canceling Carmon Creek, in which Shell is 100% owner, is a blow. The company had sanctioned the project two years ago, and in March, Shell said it would be "re-phased to take advantage of the market downturn to optimize design and re-tender certain contracts." However, following a careful review of the potential design options, updated costs and the company's capital priorities, Shell's view is that this project does not rank in its portfolio at this time." Carmon Creek's proved reserves, estimated at 418 million bbl bitumen at year-end 2014 "will be de-booked and the project estimated recoverable petroleum resources will be classified as contingent resources."

Shell is planning to hold strategy conferences next week in London on Tuesday and New York City on Wednesday to discuss its global outlook.

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