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Shell faces challenge of where to pump its sell-off proceeds

Financial Times: Shell faces challenge of where to pump its sell-off proceeds

“While Royal/Dutch Shell has been engaged in its high-profile battles over the international investigations and lawsuits following its oil reserves scandal, it has been quietly conducting a huge sale of assets.”

By Carola Hoyos

Published: September 8 2004

While Royal/Dutch Shell has been engaged in its high-profile battles over the international investigations and lawsuits following its oil reserves scandal, it has been quietly conducting a huge sale of assets.

So far this year, it has sold twice the assets earmarked in 2003 for disposal in 2004. Last year, it also more than doubled its goal, selling $4.5bn (£2.5bn) worth of assets and making a $2bn net profit.

Yesterday it agreed a further disposal, the €380m (£257.9m) sale of its 16.7 per cent interest in two Belgian gas companies, Distrigas and Fluxys, to Suez-Tractebel, the utility group.

Shell’s divestment drive is expected to play a prominent role in the strategic review it presents to investors on September 22.

The sell-off has come in both the upstream exploration and production division and the downstream marketing and retail division.

Recent sales include all of its oil fields in Bangladesh and Thailand and almost all its stake in Angola, as well as its 40 per cent stake in a gas field in Egypt. Shell has also sold or announced the sale of refineries in the US, Sweden and Thailand and pipelines in Mexico and the US.

Retail disposals include petrol stations in Sweden, Spain, Portugal and Peru. Shell has also sold its $734m holding in China’s Sinopec.

The $3.5bn that Shell announced it had sold by July 1 this year did not include assets put on the block for which it has yet to secure a buyer, including its $6bn chemical venture with BASF, Basell.

The group commented: “We are continuing our divestment programme to take advantage of good asset prices and to recycle capital into higher value opportunities.”

However, Shell is struggling to find new oil and gas ventures into which to pump the extra cash. Mid-year, it announced it would make an additional $1.5bn to $2bn in capital expenditure in 2004, mainly to boost its $9.5bn to $11bn exploration and production budget.

At first glance, such an increase looks like good news for a group that has the shortest oil and natural gas reserves life of its peers, after having to admit in a series of announcements beginning in January that it had wrongly booked more than 20 per cent of its proved reserves with the US Securities and Exchange Commission.

On closer examination, the picture looks far less rosy, analysts said. Only $200m of the additional funds will be spent to explore for oil and gas. Much will go to cover cost overruns, especially on two key projects – one in Siberia and one in Nigeria – and on extra expenses associated with unfavourable exchange rates and increased input costs rather than new, high-margin opportunities.

Shell is not the only oil group reviewing its portfolio. But its exploration and production cuts are especially significant because it can afford less easily than its competitors to lose reserves or production. What is more, several of the sales have highlighted some of the group’s shortcomings.

The disposal of its stake in Block 18 in Angola all but removed it from one of the most important new exploration regions in the world.

Echoing the view of many industry observers, one analyst said “Shell missed the boat” in Angola, where BP, its biggest European rival and ExxonMobil and ChevronTexaco, its US competitors, have staked large claims.

In the Indian basin, Cairn, the small UK exploration company that bought Shell’s stakes, has shown up its larger rival by striking oil and increasing the value of one of its purchases by 75 times.

Meanwhile, Shell has decided to hang on to some of its more mature fields, even injecting money into short-term ventures in the North Sea and the US.

In the North Sea, it has decided, for now, to keep its historic Brent field; by contrast, BP sold its ageing Forties field late last year.

On the retail side, where others are cutting their less profitable operations, Shell could be making the biggest cultural U-turn. The logo is said to be one of the most recognisable corporate symbols. This is in large part because of its large historic presence.

Irene Himona, analyst at Morgan Stanley, said: “One used to say Shell was everywhere but Albania.”

One consultant who has worked with Shell said it had finally realised that it was making little money by using retail stations as a marketing tool.

Investors are keen to know how Shell will use the money. Like its peers, it has been returning equity to shareholders but that does not solve the problem of the shrinking reserves base and improve the performance of the shares.

Given the high oil price, analysts said, the selling spree was well-timed, as is its foray into heavier, less profitable oil ventures, such as the Canada oil sands, and into new types of fuel such as gas-to-liquids, a cleaner diesel.

But they said Shell would need to improve its exploration record if it wanted to regain its lustre.

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