Royal Dutch Shell plc is working on ways to leverage its abundant natural gas resources in North America and now has plans progressing for liquefied natural gas (LNG) exports, gas-to-liquids (GTL) and gas-to-chemicals facilities, as well as LNG for transport, CEO Peter Voser told financial analysts Thursday. "These are value chain projects, which very much play to Shell's strengths."

Voser and CFO Simon Henry spoke with analysts about the company's performance in 4Q2011 and the full year, as well as the company's strategy to 2018. The portfolio is filled with global oil and gas projects, and Shell plans to spend 80% of its budget this year on capital expenditures, with 60% directed to North America and Australia.

U.S. gas prices continue to weigh on decisions, Voser acknowledged. The latest quarterly results were impacted by a "sharp downturn in industry refining margins and North American natural gas prices. The global economy and energy markets are likely to see continued high volatility." However, despite the near-term uncertainties, "Shell's focus remains on through-cycle investment for sustainable growth."

Many of the gassy projects now on the table are ambitious, and not all of them may be sanctioned, the CEO cautioned.

"Let me stress that it's early days here," he said of the various North American gas proposals. "We are looking into various value chain opportunities, and it's just too soon to say if all of these will go ahead, the precise timings, and how we balance the opportunity between spot gas exposure and integration."

Shell is keen on turning its natural gas into products more closely linked to oil prices, such as LNG and GTL, said Henry. The company is scouting locations for possible facilities in North America but at a cost of "$5 billion to $10 billion a project, we have to be selective."

However, there's no doubt that North America has become a key in Shell's portfolio. The company has stumbled in building its natural gas and oil production base since 2002; 2010 was the only year over the last decade when output rose year/year. However, output, especially in the United States, moved higher last year. Domestic gas production in 4Q2011 totaled 1.032 Bcf/d, 11% more than in 4Q2010 and the highest level for the year.

The company's "next tranche of growth" will be all about the upstream, said Voser. "I think if you look at Shell's growth profile in the last few years, the investment profile was really dominated by three large projects: Qatar 4 LNG, Pearl GTL and oilsands expansion. There is an important shift in our project flow now that these three are on stream, with 26 projects under construction, which will open up another wave of production growth."

Shell is one of the world's leading integrated gas LNG and GTL producers, a position that Voser doesn't plan to cede.

"We've delivered new projects in Qatar in 2011 and our LNG capacity now stands at 20 million tons/annum. The next tranche of LNG growth for Shell is coming from Australia, with 8 million tons/annum under construction, which is expected to lift our capacity by 40% to 2017. We've also made progress on LNG sales, with contracts for 6 million tons/annum of LNG sales signed in 2011, linked to oil markets and valued at $100 billion at today's prices. These are portfolio deals, and the gas isn't linked to any particular supply project."

The deepwater Gulf of Mexico (GOM) also continues to be an "important" region for Shell, Voser said. Although the drilling moratorium was lifted last year, the "slowdown...is still having an impact on our drilling program but we are regaining momentum here. The development priorities, beyond the projects under construction, are to launch new hub-class developments at the Vito and Appomattox discoveries...We're also getting back to work on exploration in the Gulf of Mexico, with at least five wells planned for 2012."

In addition, Shell plans to add acreage to its exploration portfolio, specifically in liquids-rich shales, he said. Production from liquids-rich shales "has the potential to reach some 250,000 boe/d in 2017," said Voser.

"We look for acreage in established plays and in frontier positions, where the subsurface is less well understood but the rewards are potentially very high. But the nature of exploration is changing, with onshore resources plays in tight gas and liquids-rich shales, which are driven by land acquisitions and drill-out, alongside more traditional offshore activities. We made a series of resources-based deals in 2011, including liquids-rich shales in several countries," and including adding more to its North American onshore portfolio.

Capital spending is set at $32-33 billion this year, slightly up from the $31.5 billion in 2011. The onus is on the company to create output from the dollars. The European-based major's production rose 5% year/year in 2010, but aside from the one year, output has fallen every year since 2002. Gas and oil production averaged 3.215 million boe/d in 2011, down 3% from 2010.

Voser told analysts that Shell's output is forecast to average 4 million boe/d in 2017-2018. A lot of spending has been done to acquire and construct some big-ticket items, he explained. With its core portfolio in place -- excluding some acquisitions yet to come -- Shell is preparing for upstream gains.

Shell plans a 35% increase in "core" exploration spending in 2012 to $5 billion as it drills up new acreage and considers new options. The increase includes a "step-up in drilling in liquids-rich shales, and continued investment in tight gas and coalbed methane," said Voser. "Setting aside these resource plays...we expect to drill 20-25 key wells in 2012, compared to 18 in 2011. This drilling plan covers both wildcat activity, and high value near-field prospects."

About 36 new projects are on the drawing board for medium-term growth, led by tight gas prospects.

"These are exciting themes for our industry, unlocking large resources positions using advanced drilling technologies," said Voser. "In liquids-rich shales, which is a relatively new play for Shell, we're looking into our existing licenses where can we produce oil from what the industry used to see as source rocks. This is very much a story of drilling up and commercializing the portfolio, building a long-lasting and profitable gas supply business, with interesting integration opportunities and building up liquids production.

"I expect to see total spending in these plays to be some $6 billion on a worldwide basis in 2012. Development spending on North America tight gas will be around $3 billion for 2012, similar to 2011, and at the low end of our spending range of $3-5 billion per year, reflecting the weak pricing environment."

A lot of Shell's dollars this year are to be directed at the Eagle Ford Shale in South Texas, following a "successful appraisal" in 2011. In total, "just over $1 billion of development spending" is to be focused on liquids-rich shales, said the CEO. Another $2 billion is tagged for exploration and appraisal to mature the new liquids-rich portfolio.

However, Shell will be keeping a close eye on cost efficiencies, Henry told analysts.

"At current macro conditions, and even with higher net capital investment, we would expect to be in cash surplus this year, after dividend payment," said Henry. "However, the macro picture is very different today compared with the environment we envisaged in early 2010: higher oil prices and downstream and U.S. gas in a down cycle. So we are moving on from these 2012 targets, and setting a new outlook for the company today, reflecting these new realities."

Based on current costs of supplies, Shell earned $6.46 billion ($1.04/share) in 4Q2011, which was 13% higher than in 4Q2010 when it earned $5.69 billion (93 cents), but down sequentially from 3Q2011 earnings of $7.25 billion ($1.16). Cash flow from operations was $6.47 billion in 4Q2011, which was 18% higher than the year-ago period.

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