– Shell (NYSE: RDS.A) (NYSE: RDS.B) today said it was entering a new period of growth, and outlined plans to sharpen up performance and reduce costs.
- Upstream production is expected to reach 3.5 million barrels of oil equivalent per day (mboe/d) in 2012, an increase of 11% from 2009.
- In addition, the company is assessing over 35 new projects from some 8 billion barrels of oil equivalent resources (boe), which should underpin Upstream growth to 2020.
- Downstream continues to focus on profitability, with plans to exit 15% of refining capacity and 35% of retail markets, and growth investment to enhance the quality of manufacturing and marketing portfolios.
- As new projects come on stream, the company expects cash flow from operations will increase by around 50% from 2009 to 2012 in a $60/bbl oil price world, and by over 80% with $80/bbl oil prices.
CEO Peter Voser (above right) commented: “These are exciting times for Shell. We are poised to deliver a new wave of financial and production growth. We are making substantial investments in new projects to drive Shell’s financial performance going forward. Shell should be in a surplus cash flow position in 2012, after capital investment and dividend payments, assuming $60 oil prices and a more normal environment for natural gas prices and downstream.”
Voser continued: “We are moving into a delivery window across the next five years, and beyond that, we have a tremendous opportunity set for the 2015-2020 timeframe. We will put the emphasis on financial performance – cash generation and returns.
Upstream, we have built up strong foundations in activities like gas-to-liquids (GTL), oil sands and liquefied natural gas (LNG). Looking out to 2020, I expect Shell’s exploration to underpin new upstream growth, especially in North America and Australia, with additional barrels from development-led projects. Downstream, we are making substantial investments in new refining and petrochemicals capacity. Once these projects are on stream, I expect the downstream growth emphasis will switch to further strengthening our marketing for the next several years.”
Peter Voser mapped out three distinct layers for Shell’s strategy development: nearer-term performance focus, medium-term growth delivery, and maturing next generation project options.
PERFORMANCE FOCUS
- Continuous improvements in operating performance, with an emphasis on
safety, asset performance and operating costs, including firm plans
for $1 billion of cost savings in 2010, and staff reduction of some
2,000 positions by end-2011.
- Asset sales of $1-3 billion/year as Shell exits from non-core positions
across the company.
- New initiatives expected to improve on Shell's industry-leading
Downstream by focusing on the most profitable positions and growth
potential. Shell has plans to exit from 15% of its world-wide refining
capacity, 35% of the company's current retail markets, and is taking
steps to further improve its chemicals assets.
GROWTH DELIVERY
- Shell has some 11 billion boe of new oil & gas resources under
construction, and selective downstream growth opportunities. This is
one of the most ambitious investment programmes in the industry.
- Net capital investment is expected to be $25-$27 billion/year for
2011-14, with up to $3 billion/year of asset sales, and $25-$30
billion/year of organic investment. Annual spending will be driven by
the timing of investment decisions and the near-term macro outlook as
Shell invests for long-term growth.
- Cash flow from operations excluding net working capital movements was
$24 billion in 2009. Shell expects cash flow to grow by around 50%
from 2009-2012 assuming a $60 oil price and a more normal environment
for natural gas prices and downstream margins. In an $80 world, 2012
cash flow should be at least 80% higher than 2009 levels.
- Downstream, Shell is adding new chemicals capacity in Singapore and
refining capacity in the US, and making selective growth investment in
marketing.
- Oil & gas production is expected to average 3.5 million boe/d in 2012,
compared to 3.15 million boe/d in 2009, an increase of 11%, in line
with previous guidance of 2-3% average annual growth rates, and with
confidence in further growth beyond 2012.
- As a result of its growth investment, Shell made proved reserves
additions of 3.4 billion boe in 2009. With 2009 production of 1.2
billion boe, this resulted in a Reserve Replacement Ratio of 288%, and
a total proved reserves to production ratio of ~12 years.
MATURING NEXT GENERATION PROJECT OPTIONS
- Shell has built up a substantial portfolio of options for the next wave
of growth in the company. This portfolio has been designed to capture
price upside, and minimize the company's exposure to industry
challenges from cost inflation and political risk.
- Exploration delivered 2.4 billion boe of new resources in 2009,
including new barrels in the Gulf of Mexico, North America tight gas,
and Australia. This was the best year for exploration in a decade.
- In North America, Shell has made great progress with tight gas, adding
8 trillion cubic feet equivalent (tcfe) of resources in 2009, bringing
the company's total to 21 tcfe (3.7 billion boe). Tight gas production
increased by over 60% in 2009 to 110,000 boe/d, with potential for
>400,000 boe/d from today's portfolio.
- In the Gulf of Mexico, the company has established at least three new
production hubs, at Vito, Stones and in the Mars area, with >150,000
boe/d production potential for Shell.
- Australia should underpin Shell's next tranche of LNG developments,
within a world-wide options set for a possible further 10 million
tonnes per year (mtpa) of capacity by 2020, which could take Shell's
total capacity to ~35 mtpa.
- In Canada, we retain options for further heavy oil expansion, with the
nearer-term priority on improving operating efficiency and facilities
debottlenecking.
- Shell's pre-FID option set for fields that could come on stream by 2020
has reached 8 billion boe of resources, with over 35 substantial new
projects that can sustain growth to 2020.
DIVIDEND
Shell has revisited its payout policy, in line with major competitors and market trends. Shell aims to grow the dividend in US dollars through time in line with its view of the underlying business earnings and cash flow of the group. In addition, the company intends to introduce a scrip dividend option, subject to approvals at the next AGM, so that investors can opt to receive new shares rather than cash dividends. These changes will enhance both Shell’s financial flexibility, and the potential for the dividend payout to be more closely linked to Shell’s profitability. The dividend for Q1 2010 is expected to be $0.42/share, and is expected to be unchanged from 2009 to 2010.
OUTLOOK
Commenting on the growth outlook, Voser said: “Our 2009 earnings were sharply reduced by the recession, despite Shell’s self-help programmes and $2 billion of cost savings. Although oil companies have been cushioned from the recession by OPEC’s action on quotas and oil prices, Shell has been disadvantaged recently, due to our higher exposure to refining and natural gas, where margins are hard-wired to the economy. This has come in a period where our spending is at historically-high levels, as we invest for medium-term growth.
Near-term pressures on downstream and gas margins remain. However, the medium-term upstream fundamentals are robust, we expect oil to trade typically in a $50-$90 range, and to trend to the upside. In natural gas, cleanest of all fossil fuels, the medium term fundamentals are also attractive for Shell. However, the global refining industry may be in over-supply for some time.
Shell’s strategy is centred on strong operating performance and sustained investment for organic growth. That strategy is robust, despite the difficult economic environment. But the company had become too complicated and slower to respond than we’d like.
So we are sharpening up.
The priorities are for a more competitive performance, for growth, and for sharper delivery of strategy. We have more to do to drive out cost and improve the operating performance in the company.”
Voser concluded: “We have come a long way in 2009, and I see tremendous opportunities for Shell in the future.”
SUPPLEMENT: RESERVES UPDATE
In 2009 the United States Securities and Exchange Commission modernized their oil and gas regulations. Most significantly, the new rules allow synthetic crude oil reserves to now be considered oil and gas reserves. Previously synthetic crude oil reserves were permitted to be disclosed only as proven minable oil sands reserves. In 2009 we had a record year in adding proved oil and gas reserves. Excluding previously disclosed proven minable oil sands reserves, we added 3,420 million barrels of oil equivalent (boe) proved oil and gas reserves in 2009. With 2009 production of 1,187 million boe, our Reserve Replacement Ratio (RRR) was 288%.
On an SEC basis, Shell added 4,417 million boe of proved oil and gas reserves before production, of which 3,632 million boe comes from Shell subsidiaries and 785 million boe is associated with the Shell share of equity accounted investments. Included in the 4,417 million boe is 1,630 million boe of synthetic crude oil reserves. Last year, we had reported 997 million boe of proven minable oil sands reserves as of December 31, 2008. As a result of the SEC rule changes these proven minable oil sands reserves have been converted to synthetic crude oil proved reserves and are included in the 1,630 million boe. Accordingly we will no longer be reporting proven minable oil sands reserves. The increase of 4,417 million boe of proved oil and gas reserves also includes approximately 270 million boe associated with other SEC changes in proved reserves reporting. Furthermore, for the first time we have included 599 million boe proved reserves associated with future production that will be consumed in operations (for example, as fuel gas). Finally, the total additions reflect a net positive impact from commodity price changes of approximately 260 million boe proved reserves.
Reserves additions in 2009 include additions from new fields in the Gorgon LNG project in Australia, deepwater developments in the Gulf of Mexico (Perdido and Auger), the BC-10 offshore project in Brazil and an extension to the Muskeg River synthetic oil project in Canada.
Proved reserves additions were also made across the global Shell portfolio including Nigeria, Netherlands, Qatar, Kazakhstan, China, Malaysia and Russia.
At end 2009, net proved reserves attributable to Shell shareholder were 14.1 billion boe, an increase of 2.2 billion boe from end-2008, including synthetic crude oil, and after taking into account 2009 production. As a consequence, Shell’s reserves to production ratio has increased from 10.0 years at end 2008 to 11.9 years at end-2009.
Further information is provided in our Annual Report and 20F, which has been filed today.
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