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Shell 'Opportunity-Rich, Capital-Constrained,' Says CEO

Royal Dutch Shell plc still holds a solid portfolio of prospects in North America's onshore and in the offshore, but there isn't enough in the budget to do everything justice, according to CEO Ben van Beurden.

Van Beurden, who took over the European major in January, spent more than an hour last Thursday discussing second quarter results during a conference call. He came in with a priority to accelerate returns and cash flow -- and deliver on a long list of projects that are coming online over the next few years.

With nearly 150 separate global operations to review, it's taken more than a little time to figure out what's working and what isn't. However, with one-third of its capital deployed in North American resource plays, the region has been a priority because "it's not been delivering acceptable returns," said van Burden. "We're opportunity-rich and capital-constrained."

He had said much the same when he discussed the first quarter results (see Daily GPIMarch 13). At that time, the company began to lay off staff in the U.S. exploration and production arm and cut spending in the Upstream Americas business unit.

It's not looking much better, he said. The United States offers "major long-term growth opportunities for shareholders," but the Upstream Americas business unit has "remained at a loss."

Shell wrote off more than $2 billion for U.S. onshore losses in  2Q2013 (see Daily GPIAug. 2, 2013). A year later it's deja vu all over again, with Shell taking a $2.1 billion writedown, mostly on unconventional properties in the U.S.

The impairments were the "consequence of reduced development spending in the Lower 48, and reduced cash flow in the near term," CFO Simon Henry said during the conference call.

The writedown "reflects the restructuring of Shell's resources plays portfolio," said Van Beurden. However, "we see attractive growth opportunities there such as natural gas integration and liquids-rich shales."

There were some big positives for the Americas unit during the quarter. The deepwater Gulf of Mexico (GOM) portfolio again was a solid contributor to the quarter. The big GOM highlight is the ramp up at the Mars B platform in the deepwater. "Our exploration program is delivering, with new finds in the Gulf of Mexico and Malaysia," said the CEO.

For the onshore, however, Shell intends to reduce its plans and devote 60% of its North American onshore monies to liquids-rich acreage, mostly in the Permian Basin and in Western Canada.

The Western Canada development is to underpin a proposed liquefied natural gas export project in British Columbia, LNG Canada (see Daily GPIFeb. 14).

Outside of some select U.S. onshore projects, Shell is "assessing the Lower 48 gas" portfolio with plans for more asset sales, said van Beurden.

Offshore Alaska, Shell put on hold plans to develop any wells in the Beaufort or Chukchi seas. But the CEO said the operator is undeterred by the litigation issues and regulatory headwinds that have stalled an appraisal program for years.

In January the U.S. Court of Appeals for the Ninth Circuit ruled that the U.S. Minerals Management Service (MMS), the predecessor agency to the Bureau of Ocean Energy Management (BOEM), may have used inadequate information regarding available reserves and environmental risks for Chukchi Sea Lease Sale 193 held in 2008, and it kicked the issue back to Alaska's district court (see Daily GPIJan. 23Feb. 8, 2008). Shell gained most of its Chukchi portfolio in that sale.

"The fact that we can’t move ahead now legally doesn’t mean that we have slowed everything down," said van Beurden. "We are continuing to be ready for a campaign when we are allowed to do so."

However, he stopped short of saying the company would try to resume Arctic drilling next summer.

"We will continue to work with local stakeholders on logistics and on permitting to keep the option to drill there safely in the future..." The drilling campaign would begin "when all the conditions are fulfilled; all the technical conditions, as well as the permit conditions, the legal challenges and blockages that need to be removed. When that will be, I don’t know. It is impossible to say at this stage."

However, "the world will need access to more oil, and the Arctic is a huge area as far as prospectivity," the CEO said. "There is a significant area already in production" outside Alaska. "In my mind, there is no doubt that the Arctic will be explored."

The company produced 3.08 million boe/d in the second quarter, only a fractional increase. But Shell said global oil production, which is more lucrative, was up 3% while natural gas production fell 8%.

Van Beurden also took a few minutes during the conference call to mourn employees who were aboard the doomed Malaysian Airlines Flight 17 carrying 298 passengers, which was reportedly shot down by a missile over Ukraine last month (see Daily GPIJuly 18). ExxonMobil employees also were aboard.

"We lost 12 people in this crash, staff, spouses and also children," said van Beurden. "I want to speak on behalf of everyone at Shell and express our thoughts for everyone involved in this event."

On a current cost of supplies, similar to U.S. net profits, Shell earned $5.1 billion in 2Q2014, compared with $2.4 billion in the year-ago period. Operating cash flow fell to $8.6 billion from $12.6 billion; excluding sales impacts and impairments, cash flow was $11 billion versus $8.4 billion. 

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