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Shell is streamlining its operations in Malaysia and Norway following its merger with BG Group

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By Micheal Kaufman on Apr 6, 2016

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has shipped a cargo of Bintulu condensate from Malaysia to New Orleans, Louisiana, Reuters reported citing a trade source familiar with the matter. This is the first time that the US is importing this type of a condensate from Malaysia.

According to news sources, the Polaris, vessel containing 200,000 barrels of the offshore oil produced by the Malaysian state oil giant, Petronas, left the Malaysian terminal in February. The tanker stopped at Singaporean port, before heading towards Louisiana.

Shell is importing crude oil from Petronas for its refinery in Norco. The Anglo-Dutch company and Saudi Aramco were joint owners in Motiva, which operated the Norco complex in New Orleans. Following the breakup of Shell and Saudi Aramco earlier this year, the Hague-based company has taken full ownership of Norco and Convent refinery. Shell expects to use the petrochemical and refining facility to test different grades of crude.

The US rarely imports crude oil from Malaysia. In January, the country imported Malaysian Kikeh and Tembikai crude oil for the first time in a year. According to the data provided by Reuters, more than 700,000 barrels of crude oil were shipped to a refinery in Hawaii. There is no data available since 2010 about Malaysian crude exports to the US.

As the shipment from Malaysia takes months to arrive to the US, many analysts and market experts had speculated that the cost of the import would outweigh the benefits. However, the cost has now dropped significantly. The cost of shipping a tanker from Singapore to the US has now dropped to 54% of the World Scale rate, from 119% previously.

As Shell is increasing its imports from the Malaysian market, the company has shelved its exploration and production (E&P) project in the frontier areas of Norway. The energy giant believes as the market situation is becoming increasingly challenging, the plan to explore the Arctic Ocean has become less attractive. The project does not fit with the company’s new portfolio, Shell added.

Later this year, Norwegian officials are expected to award the oil and gas exploration leases to international energy companies. This would be the 23rd round of licensing in the area, in which 26 companies are participating. The exploration activities in the area are likely to begin next year.

Shell also filed an application to receive several licenses in the area. Last year, the oil major said it has relevant experience from Alaska, Greenland, and Russia, to expand its operations in Norway. However, the company has pulled backed its decision, given the current market situation. According to The Wall Street Journal (WSJ), the company cited “short-term cash flow concerns and consolidation after the BG acquisition,” as the main reason behind abandoning its project in the Arctic Ocean.

According to Norway’s minister of petroleum and energy Tord Lien, as Shell is a strong company, he sees it competing with other oil companies to increase exposure in the Norwegian southeastern Barents Sea. However, after more than a 60% decline in crude oil prices and a multi-billion dollar merger with BG Group, Shell is streamlining its global operations. As the company wants to become more resilient, efficient and profitable, it is reducing its footprints in some of the areas, while increasing its operations in others.

In February, Shell completed it $50-billion deal with the London-based energy giant. Following the acquisition, the Anglo-Dutch company is planning to expand its operations in the liquefied natural gas (LNG) market and Brazilian deep-water developments.

The deal has been completed at a time when oil prices are trading at their multi-year lows. Global crude oil benchmark, Brent is trading at $38.8 per barrel, while the US crude benchmark, West Texas Intermediate (WTI) is trading at $37.07 per barrel in the European Markets today. In June 2014, crude oil prices were above $110 per barrel. The merger along with the weak commodity prices has weighed down Shell’s ability to invest in new capital projects.

The energy company has lowered its 2016 capital expenditure (capex) guidance. From its previously announced capex plan of $35 billion, Shell now expects to invest only $33 billion in energy projects this year. According to many analysts, the company might ultimately reduce its capital spending to $28 billion for the 12-month period (ending December 31, 2016). Last year, the company put its stake in New Zealand on review, while it abandoned a major project in UAE this year.

Shell’s move to abandon its plans to explore the Norwegian oil reserves is a serious blow for Arctic Ocean drilling. The officials are trying to encourage investment in the area. However, amid low crude oil prices and strict government regulations, other energy giants, including Chevron Corporation and Exxon Mobil Corporation (NYSE:XOM), have also shelved their plans in the region.

Last year, Shell also halted its drilling operations off the coast of Alaska, as it found insufficient barrels of oil to “warrant further exploration” in the area. The company had already invested around $7 billion in the project.

Editing by Omair Siddiqui; Graphics by Waqas Khan

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