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Shell Prioritizing Deepwater, Chemicals, While Slowing NatGas, Unconventionals

Natural gas and unconventionals are taking a backseat at Royal Dutch Shell plc in the near term as it turns its focus to "cash engines," driven by deepwater and petrochemicals opportunities, the global producer said Tuesday.

Beyond 2020, unconventionals in North America and Argentina, as well as "low-carbon" biofuels, solar and wind power, would become growth priorities, CEO Ben van Beurden said at the company's Capital Markets Day conference. The CEO has been unrelenting in his push to simplify since taking over in early 2015, but he also has been sharply criticized for saddling the company with debt following its takeover of gas-heavy BG Group plc (see Daily GPIDec. 23, 2015;April 8, 2015;Jan. 29, 2015).

"For the first 90 years of Shell's existence...we were the industry leader in total shareholder return," van Beurden said during the conference, which was webcast. "But we lost the lead in the 1990s...I am determined to get us back to that No. 1 position."

To that end, one of the largest integrated and liquefied natural gas (LNG) gas operators in the world is putting projects on the drawing board aside until at least 2020.

"Integrated gas, which was previously a growth priority for Shell, has reached critical mass following the BG acquisition and planned growth in LNG, particularly in Australia," van Beurden said. "The pace of new investment will slow here, and integrated gas will now prioritize the generation of free cash flow and returns."

Specifically, a final investment decision (FID) has been postponed for long-anticipated LNG Canada, a 3.2 Bcf/d project that is planned for Kitimat, BC; the delay already had been signaled (see Daily GPIFeb. 4). Woodside Petroleum Ltd.'s Browse floating LNG venture offshore Western Australia, in which Shell is a 25% partner, was scuttled in March (see Daily GPIMarch 23).

The current global LNG portfolio already is a cash engine that doesn't require new investments, the CEO said. Up to 15% of the company's LNG production is sold on the spot market, which may be used to secure long-term supply markets. For instance, Shell remains a 25% stakeholder in Chevron Corp.'s Gorgon Project offshore Western Australia, which ramped up earlier this year (see Daily GPIMarch 8). It also has a bevy of other integrated gas projects worldwide.

"LNG is still a segment that strongly supports reinvestment...but it moves in fits and starts, and it demands investment in big lumps," van Beurden said.

The conventional oil and gas business, as well as petrochemicals, now are priorities, with a renewed commitment to the deepwater Gulf of Mexico, where Shell is one of the biggest operators, and to Brazil. Investments also are to continue in the petrochemical sector, led by a FID announced Tuesday for the long awaited ethane cracker project in Pennsylvania, which is to rely on Appalachian gas feedstock (see related story).

The return to conventionals comes because of "advantaged positions and affordable growth plans here, which should create a pathway to improved returns and material free cash flow from around 2020, as these businesses become new cash engines," the CEO said. Production from deepwater fields is forecast to double to about 900,000 boe/d by 2020, versus 450,000 boe/d in 2015.

"Brazil and the Gulf of Mexico represent the best real estate in global deepwater," he said. "We are developing competitive projects here based on this advantaged acreage," which includes the Appomattox field, where an FID was sanctioned last year (see Daily GPI,July 1, 2015). Appomattox would be Shell’s eighth and largest floating platform in the U.S. offshore, with average peak production estimated to reach 175,000 boe/d.

In the chemicals sector, Shell already has brownfield growth projects ongoing  on the U.S. Gulf Coast and in China, he added. Once these projects are onstream early in the next decade, Shell's ethylene capacity should reach about 8 million metric tons/year (mmty), compared with 6.2 mmty today.

"Selective growth" is key until the economics of some projects makes sense. When he took over last year, van Beurden said Shell could cancel up to 40 projects within three years. Tuesday he affirmed that Shell may pull its entire business operations from up to 10 countries by 2018. The revamped strategy is for "stable businesses, which underpin the financial delivery of the company today. They should have strong and resilient returns and free cash flow, to fund dividends and the balance sheet well into the next decade and beyond...Through-cycle returns here should be attractive and competitive."

With fewer projects planned, capital expenditures (capex) are being slashed even more. Capex for 2016 was set in December at $33 billion, but it's now trimmed to $29 billion, about one-third below 2014 pro forma capex for Shell and BG combined. Through 2020, annual spend is expected to be $25-30 billion.

"By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling noncore positions, we can reshape Shell into a more focused and more resilient company," van Beurden said. Shell also expects to recoup more in its BG integration, with merger-related costs expected to be $4.5 million by 2018 on a pre-tax basis, versus a previous target of $3.5 billion. Up to $30 billion of assets also are being sold between now and 2018.

Based on the updated plans, there's a potential by 2020 for $20-25 billion of organic free cash flow and a 10% return on average capital employed "in a $60 oil price environment," the CEO said.

"I see important opportunities for Shell from the substantial and lasting changes underway in the energy sector. We expect to see robust demand for oil and gas for decades to come, in a global energy system in a long-term transition to lower carbon fuels. As well as low oil prices today, we are seeing higher levels of price volatility, due to geopolitical change, the speed of information flows, and the pace of innovation in our sector."

Future opportunities are slated from "shales and new energies...These businesses are expected to become significant growth priorities for Shell beyond 2020 as we establish clear pathways to profitability. They are themes with material value and upside potential to deliver returns for Shell shareholders.

"Investment here remains relatively low, focused on current positions and identifying potential opportunities. Free cash flow will likely be negative and returns low for some time. Capital employed here is constrained until attractive opportunities are developed." But there is "substantial long-term growth potential" for North America and Argentina's unconventionals.

"Overall, Shell's focus is on reshaping the company...This is a value-driven, not time-driven, divestment program, and an integral element of Shell's portfolio improvement plan...Our strategy should lead to a simpler company, with fundamentally advantaged positions, and fundamentally lower capital intensity."

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