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Shell Scuttles Alaska Drilling, Says BC LNG Project a 'Maybe'

Alaska offshore drilling is off the table and a proposed liquefied natural gas (LNG) export project for British Columbia (BC) is on the line as Royal Dutch Shell plc reconfigures its portfolio, CEO Ben Van Beurden said Thursday.

Van Beurden, who took over the oil major on Jan. 1, spent 45 minutes discussing what the company needs to do to get back on track.

"Our momentum slowed in 2013. We must improve our financial results, achieve better capital efficiency and continue to strengthen our operational performance and project delivery." Shell's  overall strategy is "sound," but there's just too much on the table to do well, he told analysts during a webcast.

"Our ambitious growth drive in recent years has yielded a step change in Shell's portfolio and options, with more growth to come, but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas."

The overall strategy "remains robust, but 2014 will be a year where we are changing emphasis, to improve our returns and cash flow performance." Priorities going forward are enhanced capital efficiency, "with hard choices on new projects, reduced growth investments and more asset sales."

In addition, Shell wants to improve its financial performance, which may require some restructuring within the 150 business units, the CEO said. "The landscape the company had expected has changed. Factors such as the worsening security situation in Nigeria in 2013, and delays to nonoperated projects in several other countries, have altered the outlook.

"Oil prices remain high globally, but North America natural gas prices and associated crude markers remain low, and industry refining margins are under pressure. Restructuring and improving profitability in North America upstream resources plays, and oil products worldwide, is a particular focus for the company."

To that end, Shell has scratched drilling in offshore Alaska this year, an endeavor in which that over the past six years it has spent close $6 billion. The U.S. Court of Appeals for the Ninth Circuit ruled earlier in January that a federal lease sale held in 2008, in which Shell captured most of the offerings, may have used inadequate information regarding available reserves and on environmental risks (see Daily GPI, Jan. 23).

The circuit court's decision against the Department of Interior "raises substantial obstacles to Shell's plans for drilling in offshore Alaska" and the exploration program for 2014 has been scuttled. "This is a disappointing outcome," van Beurden said. "But the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014. We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible."

As it culls its portfolio, $15 billion in combined upstream and downstream assets are to be sold through 2015. "We are making hard choices in our worldwide portfolio to improve Shell's capital efficiency." No longer will the company update previous cash flow and net spending targets. "I want Shell to be measured on our competitive performance."

Shell now has four big LNG export projects being considered, including floating LNG (FLNG) in Australia. Whether they go forward depends on what they bring to the table, van Beurden said.

Shell earlier in January sold its stake in the Wheatstone LNG export project planned for Western Australia (see Daily GPI, Jan. 21). Van Beurden promised at the time that Shell would remain a "major player" in Australia's energy industry.

"Innovative large-scale projects such as [Qatar] Pearl gas-to-liquids have been the main drivers behind Shell's recent increase in cash flow, which reached over $87 billion in 2012-2013 combined, an increase of 35% on 2010-2011," he said. Recent start-ups and the latest projects and acquisitions have been dominated by LNG, deepwater oil in the Gulf of Mexico and overseas, and they are expected to "build on this growth" this year.

However, not all investments will make the cut. Van Beurden specifically mentioned the slate of LNG endeavors now within the tent; there are four, including the BC export project, which Shell has been pursuing with an Asian consortium; the Canadian government approved it last year (see Daily GPI, Feb. 26, 2013). He said "maybe" Shell would do all of four proposals, but he specifically praised FLNG facilities, which "look good." The BC project currently is designed to be built onshore and is one of about a dozen competing in that very expensive space.

Although some LNG and many deepwater investments will make the cut, FLNG projects "look good." Also Shell continues to mesh its LNG unit with the acquisition last year of nearly all of Repsol SA's global assets, and those are a big priority (see Daily GPI, Feb. 27, 2013). A final investment decision on the BC terminal isn't expected until mid-decade; it doesn't involve FLNG at this point.

Capital spending, cut this year by around 20% to $37 billion from $46 billion in 2012, will be focused. Poor performance in 2013 has driven many of the new management team's decisions for a do over. Van Beurden warned in mid-January that 4Q2013 results would be significantly lower (see Daily GPI, Jan. 17). That warning was realized in the final three months of last year.

On a current cost of supplies, frequently used by European-based majors, Shell earned $2.2 billion (68 cents/share) in 4Q2013, 70%-plus lower than in 4Q2012, when it earned $7.4 billion ($2.34). Full-year earnings year/year also plummeted by 39% to $16.7 billion ($5.32/share) from $27.2 billion ($8.68). Cash flow from operations was down 39% in the quarter at $6.03 billion from $9.91 billion.

Higher depreciation, increased exploration expenses, lower upstream volumes and "weak industry conditions" in downstream products were blamed.

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