David Lawrence, the executive vice president directly responsible for Alaskan operations has left the company. A Shell spokesman says that “Mr. Lawrence’s departure from Shell is by mutual consent.” Lawrence had been with Shell since 1984. His departure was first reported on the site started by longtime Shell gadfly Alfred Donovan. So will David Lawrence be enough of a sacrificial lamb for Shell to satisfy investors that it’s learned its lessons? Or should the buck stop higher up the pecking order, perhaps with Marvin Odum, president of the entire Americas division…; If Odum can be this disingenuous about a certified “screw up” then you have to wonder: what else at Shell is subject to subterfuge?
Published 3/26/2013 @ 1:20PM
David Lawrence, the executive vice president directly responsible for Alaskan operations has left the company. A Shell spokesman says that “Mr. Lawrence’s departure from Shell is by mutual consent.” Lawrence had been with Shell since 1984. His departure was first reported on the site started by longtime Shell gadfly Alfred Donovan.
A year ago Lawrence had said that Shell’s planned Arctic drilling “is relatively easy.” So it’s fitting that he was made to answer for the disastrous Alaskan campaign which was marred by a host of delays, accidents and mishaps. The misadventure resulted in a couple of wells being started, then abandoned, and one of Shell’s rigs, the Kulluk, being damaged in a grounding near Kodiak Island. “ Shell screwed up in 2012,” said Interior Secretary Ken Salazar earlier this month.
Since Shell acquired its Alaska leases in 2008 it has spent more than $5 billion on the program, with nothing yet to show for it.
But investors need to consider whether Alaska is just a distraction for the company, or a symptom of bigger, deeper problems that have yet to be addressed. Is Lawrence enough of a scapegoat for Shell’s lackluster performance, or does the axe need to fall again, higher up the foodchain?
In 2012 Shell earned a measly $512 million on its upstream exploration and production business in North and South America. In the second half of the year Upstream Americas actually lost money.
Alaska was just part of the problem.
Natural gas prices were below Shell’s cost of production leading the company to write down the carrying value of big dry gas fields like the Haynesville and Pinedale by hundreds of millions of dollars. Shell also got hit by big noncash amortization charges tied to acquisitions of shale acreage and other unconventional resources in recent years — acreage that it hasn’t yet developed. What’s more, Shell’s Canadian oil sands projects have suffered from a lack of pipeline capacity to get heavy crude to market; prices for Western Canadian sour crude dropped to $61 per barrel in the fourth quarter of 2012 versus $110 for Brent crude.
Oswald Clint, analyst at Bernstein Research, figures in a recent detailed report on Shell’s American earnings that although the performance of the Americas division should improve over the next few years as the company brings new fields online, especially in places like the Eagle Ford of Texas, the division will continue to be a very low-returning business.
How low? Considering that Shell has $56 billion of capital employed in Upstream Americas, its return on average capital employed was just 1% in 2012, and should recover to only 8% in 2015, figures Clint. That’s a quarter of Shell’s global capital base making a measly return.
And it pales in comparison with the likes of Chevron, which earned $6.4 billion in its Western Hemisphere upstream operations last year from an oil and gas production base of roughly 800,000 boepd, about the same as Shell.
So what gives? Shell didn’t have these problems in the rest of the world, where the company generated net income of $22 billion and free cash flow (before amortization, depreciation, etc) of $46 billion last year.
And Alaska isn’t responsible for all of the shortcoming. Indeed, the biggest difference between Shell and Chevron in the United States (aside from Alaska) is that Chevron has long been more focused on oil, while Shell gets a bigger portion of its production from natural gas.
Shell’s current lackluster performance pales against the heyday of 2005 through 2008, when natural gas prices were rising and the Upstream Americas division delivered 22% of Shell’s worldwide earnings. It was when natural gas prices fell off a cliff in late 2008 that Shell’s American fortunes really deteriorated.
It’s no coincidence that 2008 was also the time when Shell decided to plunge after oil-focused exploration in Alaska. Since then it’s tried to diversify by adding more onshore oil and natural gas liquids to its offshore-heavy Americas portfolio.
– Going after the Eagle Ford shale of south Texas, Shell forked over a $1 billion bonus to lease the 100,000-acre ranch of Dan Harrison in south Texas.
– And last year it acquired oil-rich acreage in the Permian basin from Chesapeake Energy for $1.9 billion.
– It’s also spent $4.7 billion to grab acreage in the Marcellus shale, as well as the Niobrara and Mississippi Lime play of Kansas.
As Shell is still in the early stages of developing some of these U.S. assets, it will take time and money to convert them into meaningful cashflow.
Shell says that its spending on exploration (both capital investments and exploration expenses) in the United States soared in 2012 to $11.3 billion from $6.4 billion in 2011 and $9.4 billion in 2010. A Shell spokeswoman explains that of that $11.3 billion in spending, $5.8 billion was directed to “organic spending” on drilling and development work rather than on acquisition costs or Alaskan screw ups.
Meanwhile, Shell is looking for ways to make its money-losing U.S. natgas business pay off. Proposals include a building a gas-to-liquids plant on the Gulf Coast like the giant Pearl GTL plant Shell has finally finished in Qatar. Shell is also pushing liquefied natural gas as a fuel for trucks and recently made a deal with pipeline giant Kinder Morgan to build an LNG plant and export facility at Kinder’s existing regas terminal at Elba Island, Ga.
Repositioning a giant oil and gas portfolio takes time, even when you’re not distracted by mishaps in Alaska. Shell has already announced that it won’t be trying to drill again in Alaska this year.
So will David Lawrence be enough of a sacrificial lamb for Shell to satisfy investors that it’s learned its lessons?
Or should the buck stop higher up the pecking order, perhaps with Marvin Odum, president of the entire Americas division, and the man ultimately responsible not just for the Alaska fiasco, but for its lackluster performance overall?
It’s only natural that Shell try to downplay the events in Alaska, but I find it hard to give Odum the benefit of the doubt after reading the statement he wrote about the grounding of the Kulluk for Shell’s most recent in-house magazine.
… it’s important to note that this was a marine transit issue that occurred after completion of our exploration program and well outside our theater of operations. It did not involve drilling operations. I do not agree with what some observers have suggested—that it is impossible to drill safely in the Arctic—specifically Alaska. Our 2012 record—with no significant injuries and no environmental damage—proves it can be done, …
It’s clearly stretching truth to say that the loss of control that led to the Kulluk’s grounding “did not involve drilling operations” and was “outside our theater of operations.” The entire Alaskan expedition involved drilling operations. Everywhere that equipment goes should be considered Shell’s theater of operations. What’s more, although Shell did technically do some drilling in Alaska, it is far from safely completing a well there and further still from producing any oil and gas.
Investors don’t appreciate a snowjob, especially when it is so obvious. If Odum can be this disingenuous about a certified “screw up” then you have to wonder: what else at Shell is subject to subterfuge?
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