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Shell Sees Depressed Gas, Oil Prices for 12-18 Months

Natural gas and oil prices are unlikely to rebound over the next 12 to 18 months, but Royal Dutch Shell plans to forge ahead with some capital-intensive projects to prepare for the eventual upturn, CFO Peter Voser said last week.

Voser, who's due to take over the European-based oil major in July from retiring CEO Jeroen van der Veer, told energy analysts during a conference call that Shell is "on track" to generate 2-3% production growth from 2010 to 2012. However, worldwide gas and oil "demand is likely" to fall more this year because of the recession, Voser told analysts. "In the near term, the next 12 to 18 months, it's difficult to see an uptick in the oil and or gas price."

Shell's earnings slumped 62% from a year ago, but for 2009 it still plans to spend $31-32 billion worldwide to revive the gas and oil output, Voser said. Shell's planned capital expenditures (capex) are higher than smaller European-based BP plc, which last week cut its capex plans for 2009 to less than $20 billion (see related story). However, Shell's spending is on par with ExxonMobil Corp. (see related story).

"We expect to spend that but not more," Voser said of Shell's capex. "We think exploration is the best and cheapest way to find barrels."

Although Shell spends less money in the United States than some of its peers, it has no plans to curtail domestic exploration and production (E&P) plans, said Voser.

"The U.S. E&P business is fundamentally in a growth mode," he said. Some of Shell's competitors may have more experience operating onshore, but "we have built up an exploration position that is significant in the United States in the last few years. Quite clearly, this has resulted in long cash charges, and the acreage is being amortized in 10- to 15-year leases. It does obviously impact your earnings, but we look at this kind of like we have a higher proportion of our capital under construction, capital for future construction. When you look at earnings...we made a billion in cash in E&P in the United States...That we can actually generate cash in the growth mode, that works very well."

Shell is a leading player in the U.S. offshore and in Alaska, but it also has quietly built an onshore position. Last year Shell Canada Ltd. acquired Canadian-based Duvernay Oil Corp. for C$5.9 billion in cash, which gave it half a million net acres in the Western Canadian Sedimentary Basin (see NGI, July 21, 2008). The transaction included acreage in the emerging Montney tight gas trend in northeastern British Columbia. Shell also has North American assets in South Texas, the Pinedale Anticline of Wyoming and the Haynesville Shale of Louisiana.

Mirroring reports by other industry players, Shell has seen its oil service costs decline over the past few months. However, Voser said Shell wanted to take a "prudent approach to the economic downturn, and maintain our investments for upstream and downstream growth to provide financial flexibility." Shell has postponed investment decisions on upgrading its deepwater Mars platform in the Gulf of Mexico to see where prices and costs go. Working collaboratively with suppliers, Shell has negotiated price reductions on some contracts written in 2005 and 2006. Well service contracts are down 10-30% from previous levels and some contracts with integrated oil service providers are down 10% to 15%.

Worldwide, Shell's quarterly production fell 3.6% to 3.4 million boe/d from 3.5 million boe/d in 1Q2008. "Upstream oil and gas volumes were impacted by ongoing security challenges in Nigeria, OPEC quota restrictions and weakening industrial demand for natural gas," said Voser.

Asked about global industrial gas demand through the rest of the year, Voser was pessimistic.

"Shell's oil and gas production is 50-50, but the gas prices do vary by regions," he said. "We are most exposed to plays where gas is linked to oil prices, like in Asia with LNG [liquefied natural gas]...What we have seen so far is that the lower offtake for LNG started in Q1 [1Q2009], and we expect that to continue through '09. Also, the underlying LNG capacity is up, so LNG customers are taking less gas, especially in Asia and the Pacific. In Europe we have a large gas position, and we've seen the impact of lower gas demand, and we expect that to continue in '09...Demand in certain markets has been severely affected by the recession, and we expect that to continue."

In North American gas markets, "we also see the impact of weak demand," said Voser. "Overall, year on year, we think gas demand will be down...but it's hard to predict at this stage."

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