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Shrinking Giants: Royal Dutch Shell long list of abandoned projects

Screen Shot 2013-12-22 at 19.09.52A total of $15 billion worth of assets are expected to be sold this year and next, including petrol stations in Australia, offshore production capacity shares in Brazil, pipelines and a host of other assets (link). Problem is that many of the projects were meant to boost production both upstream and downstream, which means that most likely Shell will not be able to stem a steady long-term production decline.

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Zoltan Ban: February 5, 2014

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Royal Dutch Shell (RDS.A) (RDS.B):

While in 2012 total production of oil and gas increased by about 47,000 barrels of oil equivalent, it seems that Shell production declined for 2013 by 1.8% compared to 2012 and fourth quarter decline was 4.7%, compared to the fourth quarter of 2012. This decline will probably continue into 2014 and perhaps beyond as Shell actually tries to divest from many projects which were hoped to bring more production online (link).

Long list of abandoned projects:

Oil shale also known as kerogen deposits always captured the imagination and fascination of many people, due mainly to the huge size of the deposits found mainly in the United States. Royal Dutch Shell was among the many companies which figured that being the first to unlock the potential of hundreds of billions, or even trillions of barrels of oil found within the deposits would be a huge competitive advantage over competition as well as a way to make up for dwindling opportunities in more conventional fields. After many years of conducting pilot projects in the field, they quit last year (link).

The over 100,000 acres Shell acquired in 2010 in the Eagle Ford field went up for sale last year, as the returns on the investment proved to be disappointing (link). In the second quarter of 2013, Shell reported a write-down of $2 billion on liquids rich shale operations. At the time, there was little detail given in regards to the specific reason why it was deemed necessary and which operation was responsible. I pointed out then in an article (link) that it was probably the Dimmit County property which a USGS study in 2012 found to be a region with comparatively poor per-well production results in the Eagle Ford. As it turns out, it seems the 2012 USGS report has some relevance in giving us some indication in terms of what to expect in terms of returns on investments.

The Proposed Gas to Liquids (GTL) plant in Louisiana never got off the ground as Shell decided to axe the project on concerns of the future of natural gas prices. The plant was going to produce over 100,000 barrels of GTL diesel fuel per day at a capacity cost of about $100,000 per barrel per day. Given that feasibility of the project was seen only as long as crude oil stays above $100 a barrel and natural gas at under $6 per million BTUs, Shell decided it is too risky (link1, link2).

Exploration in Alaska was abandoned early this year for the remainder of 2014. The company’s new CEO Ben van Beurden cited during the Q4 presentation a court decision which found that the exploration permit to Shell was awarded by the Interior Department based on inadequate information. Truth is however that after years of exploration and $5 billion spent, Shell found out that operating in the arctic was expensive and technically challenging. It is possible that the decision to suspend operations will be permanent.

These are just a few examples of Royal Dutch Shell divesting itself from various projects upstream and downstream. A total of $15 billion worth of assets are expected to be sold this year and next, including petrol stations in Australia, offshore production capacity shares in Brazil, pipelines and a host of other assets (link). It is all part of trying to keep its net capex spending down, which last year came in at $44.3 billion. Problem is that many of the projects were meant to boost production both upstream and downstream, which means that most likely Shell will not be able to stem a steady long-term production decline.

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