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U.S. LNG Export Plans 'Little Bit Optimistic,' Says Shell CFO

November 5, 2012
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Industry pledges to invest a total of up to $450 billion to export liquefied natural gas (LNG) from the United States are "a little bit optimistic," Royal Dutch Shell plc CFO Simon Henry said last week.

Shell, which is one of the world's largest LNG suppliers, is heading up the most ambitious export project yet announced in North America, a 24 million ton/year facility to be sited near Kitimat on British Columbia's coast (see NGI, Aug. 6a). It also is in talks to take a stake in the Freeport LNG Expansion LP, which is to be sited on the Gulf Coast in Texas (see NGI, Aug. 6b).

All together, the industry has pledged to invest $350-450 billion for U.S. LNG exports, but Henry told analysts Thursday he's not sure all of them will make the cut.

"If that's all going to happen without inflation and with the support of the American people to export all that American gas to industrial competitors, and it's all going to happen by 2020, I think it's a little bit optimistic," he said during a conference call. "Today's headlines usually become tomorrow's challenged projects." Others have expressed a similar view, although one analysis predicts 10 Bcf/d of exports within 10 years from North America (see NGI, Oct. 15; Aug. 13).

Shell, like competitor ExxonMobil Corp. (see related story), is reducing its U.S. gas development because of low prices, said Henry. He was asked when Shell's U.S. gas development would turn positive.

"Henry Hub prices of $5.00 would help on turning positive," he said with a chuckle. "That would certainly help. We don't gibe bottom-line income for onshore gas on the grounds that there are significant allocated expenses that confuse investors, but total appreciation is $3 billion per year at the moment. When it will turn positive is difficult to say. When does the [U.S.] liquids volume offset gas?" He said exploration chief Marvin Odum thinks it will be "at the end of 2014 in volume terms. At current oil and gas prices, arbitrage cash and earnings get better at the end of 2014..."

The oil major's 3Q2012 earnings fell to $6.1 billion, compared with $7.2 billion a year ago. Cash flow from operations totaled $9.5 billion. Shell spent an estimated $8.8 billion net for capital investments, and it sold about $8 million worth of assets in the latest quarter.

The biggest earnings hit in the quarter came from a $354 million impairment charge related to Shell's onshore natural gas properties in North America. The impairments partially were offset by $554 million in divestment gains, and the mark-to-market valuation of some gas contracts. Natural gas realizations in North America fell by 38%, while realizations outside of North America rose 8%.

Production in 3Q2012 was 2.982 million boe/d, down from 3.012 million boe/d a year ago. Worldwide, liquids output fell by 5%, while gas production rose by 4% year/year. LNG sales volumes of 4.97 million tons were 4% higher from a year ago, mostly because of sales volumes from the Pluto project in Australia.

"Shell is driving a long-term and consistent strategy, against a backdrop of volatile energy markets," said CEO Peter Voser. "Our profits pay for substantial investments in new energy supplies, and they pay dividends for our shareholders."

He said Shell had "made progress" with its Alaska offshore exploration program, which ended the 2012 drilling operations last week. "The industry continues to assess offshore potential there. This will be a multi-year exploration program, demonstrating Shell's commitments to high standards on sustainable development and safety."

Shell also continues to "refresh" its portfolio, said Voser, by "launching new oil and gas developments, making new exploration discoveries, purchasing new liquids-rich shale acreage and increasing our positions in oil and gas fields where we can add value with our innovation and scale..."

In the United States during 3Q2012, Shell acquired 618,000 net acres in the Permian Basin in West Texas from Chesapeake Energy Corp. for $1.9 billion (see related story). Shell also sold its half-stake in the Holstein field in the Gulf of Mexico for $600 million; its share of production was 5,000 boe/d.

"I am pleased with our progress in a difficult industry environment," said Voser. "There is more to come from Shell."

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