At a strategy review in London Wednesday, Shell outlined its plans for the coming years, announcing it would extend its liquefied natural gas (LNG) leadership position and divest of $10-12 billion in assets between now and 2006. To succeed in reestablishing its leading position, the number three oil major plans to spend $45 billion through 2006, nearly all of it on upstream activities.

Jeroen van der Veer, chairman of the committee of managing directors, acknowledged that the company has gone “through some very rough times” in the past few months, beginning with the reclassification of its oil and natural gas reserves in January. However, “priorities for the way forward” include more upstream activities and improving the downstream unit’s bottom line. Shell also is “raising the performance bar,” and van der Veer said the company is fostering an “enterprise first” culture.

“Everyone at Shell understands the urgent need for performance and delivery,” said van der Veer. “This requires action and decisiveness in everything we do. We have an invigorated and more open ‘enterprise first’ culture, and I am confident of our ability to succeed.”

He and other Shell executives deferred updating the rumored overhaul of its corporate structure. The company is 60% owned by Royal Dutch Petroleum of the Netherlands and 40% owned by London-based Shell Transport & Trading. Van der Veer said, however, that the company is “considering all options” to improve its corporate governance, including possibly unifying the twin boards under a single CEO.

Some organizational shifts within the Downstream group are planned, but Wednesday, the talk was centered on two business units: Exploration & Production (E&P) and Gas & Power.

“More upstream and profitable downstream requires…first, the reshaping of our portfolio through a step-up in organic investments to $15 billion per year; second, the ongoing divestment of non-strategic and underperforming assets; third, looking at focused acquisitions with a clear path forward to create value,” said van der Veer. Of the $15 billion a year through 2006, Shell plans to spend $11.5 billion a year through 2006 on the upstream businesses.

Malcolm Brinded, CEO of E&P, explained how Shell plans to regain an upstream advantage. The portfolio, he said, generates significant cash flow from core producing areas, and “though the overall resource base remains significant, proved reserve life is relatively low and it is essential to convert existing resources into proved reserves and production.”

E&P plans to invest in sustaining profitable core areas, in growing integrated gas positions and large-scale oil projects, and in maturing additional unconventional oil production, including its syncrude projects in Canada. New investment and business development will target areas with growth potential and exposure to price upside.

“The proved reserve replacement ratio is expected to average at least 100% for the period 2004 to 2008,” said Brinded. That replacement ratio includes the previously announced expected rematuration of some 50% of the restated reserves by the end of 2008. “Total expected producible resources are some 60 billion boe, showing no material change from the end of 2002. It is planned that by the end of 2009, the (E&P) Group will bring on stream the facilities and infrastructure that allow us to unlock some 13 billion boe of such resources.”

Shell expects production this year to fall between 3.7-3.8 million boe/d, and between 3.5-3.8 million boe/d in 2005 and 2006. However, as new projects kick in — especially in the deepwater and overseas — production is expected to grow to between 3.8-4.0 million boe/d in 2009.

Exploration will focus on “big cat” wells (prospects greater than 100 million boe for Shell’s share), with spending levels approaching some $1.5 billion a year. Since the beginning of 2003, the E&P has had six significant discoveries in Nigeria, three in Kazakhstan, one in Egypt, one in the Gulf of Mexico and three in Malaysia.

The average unit finding cost of volumes discovered since the beginning of 2003 is about $1.2/boe. Also since last year, more than 260,000 square kilometers of acreage was acquired, which Shell believes holds the potential to deliver 30 “big cat” prospects. Looking forward, 15-20 wells a year of that magnitude are planned.

In the past three years, Shell has sold about $2.4 billion in assets. However, Brinded confirmed that another $5 billion of “divestments, dilutions and swaps” are planned through 2006. He did not elaborate on which properties are slated to be sold.

Linda Cook, CEO of Shell’s Gas & Power Group, explained Shell’s big plans for growing LNG. As the “world’s largest supplier of LNG and second largest natural gas producer,” Cook said the company now holds “leading positions” in the world’s three key markets. Shell’s LNG business delivered a 13% annual increase in total sales between 1999-2004, and sales are expected to increase to around 10 million tons/year in 2004.

Building on its strength worldwide, Cook said Gas & Power plans to create more value by accessing and monetizing new natural gas resources across the value chain by leveraging its global portfolio, technology and capabilities; increasing access to major and emerging markets; delivering complex, integrated gas plays; and actively managing the portfolio.

“Over the last five years, Shell has delivered eight LNG trains in four countries — responsible for 20% of today’s global capacity,” said Cook. Major projects going forward include Nigeria LNG trains 4, 5 and 6; Sakhalin II LNG; LNG import terminals in North America; and the Pearl Gas to Liquids project in Qatar.

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