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Royal Dutch Shell plc Ramps up Production Despite Crude at $50 per Barrel

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By Staff Writer on Sep 7, 2016 at 11:30 am EST

The oil majors continue to overlook the low crude environment, which is expected to persist for longer, so much so that they have resorted to increasing their production at record-breaking highs. According to estimates by analysts, overall output from the seven largest energy giants globally is set to surge 9% between 2015 and 2018.

Energy giants are grappling with deteriorating balance sheet positions, even as prices continue to hover near $50 per barrel, dropping from $115 per barrel in June 2014. However, they continue to pump crude from plants sanctioned earlier.

The crude market recovery is not expected to reach pre-crisis levels soon. However, Bidness Etc believes the slight albeit persistent rally in oil price during the second quarter of fiscal year 2016 fueled positive sentiments among oil producers to increase cash flows and deliver healthy payouts to shareholders. West Texas Intermediate is trading at $45.23 per barrel up by 0.89%, and Brent crude is trading at $47.76 per barrel up by 1.06%.

The market crash forced oil majors to take several measures. Many resorted to asset sales, reductions in headcount, and capital expenditure cuts. Several others including Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) have switched to natural gas.

Shell’s recent BG Group acquisition earlier this year in a deal worth $50 billion and Exxon’s recent increased interest in Mozambique gas fields and Papua New Guinea clearly indicate that the companies are focusing more on LNG markets. We believe that with the help of penetration in the LNG market, the companies would not only enjoy cheaper costs and quicker processing times, they are also likely to drive away pressure from green groups. As climate change risks pose increased threats to human health, ecology, and the entire planet, environmentalists are forcing oil majors to ban the use of fossil fuels as they emit greenhouse gases.

Barclays analyst Lydia Rainforth said: “2017 is the sweet spot for integrated companies. It took two to three years to adjust to the drop in oil prices, and a lot of the efficiencies introduced in recent years will roll into 2017, when projects kick in and free cash flow will improve.”

The resilience is majorly owing to new crude oil and gas projects coming online as companies shift toward renewable sources, hydrocarbons, and cleaner sources of energy. At the same time, we believe that cleaner sources of energy may not be able to replace oil and gas, since the survival of the energy sector globally is dysfunctional sans fossil fuels.

According to BMO Capital Markets, over the next couple of years, Shell is projected to experience the strongest growth rate of around 8% in contrast to BP plc (ADR) (NYSE:BP) and other rivals. As per latest updates, the company has reportedly commenced production in ultra deepwater fields at Stones in the Gulf of Mexico.

Production may ramp up to 50,000 barrels of oil equivalent per day by the end of next year. Shell’s Upstream Director Andy Brown stated Stones is exemplary to the company’s leadership skills ”which are key to profitably developing our global deep-water resources.” The company stock is up 0.64% trading at $50.28 per share, reflecting the increase in crude price from $27 per barrel earlier this year.

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