Royal Dutch Shell plc has launched a strategic review of its North American oil and gas operations, particularly the unconventional assets, after taking a charge of more than $2 billion on the value of its U.S. and Canadian liquids-rich properties.
The review of the North American portfolio may lead to the sale of as much as half of Shell's main nine unconventional natural gas and oil assets, said CEO Peter Voser.
The deepwater Gulf of Mexico (GOM) portfolio continues to make a "solid profit," but it's less rosy overall for North America, with the exploration and production unit likely to remain at a loss through "at least" December, Voser said Thursday.
Shell also has abandoned plans this year to drill offshore in Alaska, which has further cut into the outlook.
"We are not targeting oil and gas production volumes; rather we are focusing on financial performance," Voser said. Shell had set a target to increase oil and gas output to 4 million boe/d by 2017-2018. That target now has been "retired."
CFO Simon Henry told analysts during a conference call that the "production curve is less positive than we originally expected."
The writedown doesn't mean that Shell has soured on North America's unconventionals, said the CEO. "I think the liquids-rich shale development in North America in general is progressing well," and the reduction in the value of some assets only reflects the higher risks involved in developing the portfolio, Voser said.
Shell has made some of the largest capital commitments of any overseas major in North America, including its big investments in the Gulf of Mexico. The operator currently produces about 300,000 boe/d in its unconventional North American resources, of which about 50,000 boe/d came from liquids-weighted shales at the end of 2012, Henry told analysts.
In North America, Shell's unconventional portfolio includes land in Pennsylvania's Marcellus Shale and Ohio's Utica formation, as well as in the Bakken Shale, the Rockies, California, Kansas and in British Columbia.
The writedown reflects "the latest insights from exploration and appraisal drilling results and production information," and executives declined to say what that meant.
"Higher costs, exploration charges, adverse currency exchange-rate effects and challenges in Nigeria have hit our bottom line," Voser said. The quarter's results "were clearly disappointing to Shell."
Shell is undergoing a "rigorous" review "to improve our capital efficiency and refresh the portfolio for growth," he said. "We have completed some $21 billion of divestments in the last three years and some $4 billion in the last 12 months alone, with more to come.
"Shell is entering a new phase of more substantial portfolio change, which will lead to a higher rate of divestments in the coming years." Besides possibly selling North American assets, the review includes plans to possibly sell Nigerian assets, which have been besieged by poor security and declines in production.
"Oil theft and disruptions to gas supplies in Nigeria are causing widespread environmental damage, and could cost the Nigerian government $12 billion in lost revenues per year," Voser said. "We will play our part, but these are problems Shell cannot solve alone."
The writedown reverberated across the second quarter report and was the primary cause of a 60% decline from year-ago profits, Henry said.
The current cost of supplies, a figure used by European producers that excludes gains/losses from inventories and is equivalent to U.S. net profit figures, totaled $2.39 billion (27 cents/share) in 2Q2013, versus $5.98 million (66 cents) in the year-ago period. Excluding one-time charges, Shell earned $4.6 billion, still 20% off year/year. Group revenues fell to $112.67 billion from $117.07 billion.
Total production in 2Q2013 was 3.062 million boe/d, down 1% year/year. Besides issues in North American, Shell was negatively impacted by poor security problems in Nigeria, which reduced quarterly output by 100,000 boe/d.