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Shell’s New Strategy: Spend, Sell Assets

The New York Times: Shell’s New Strategy: Spend, Sell Assets

“Years of under-investment and scatter-gun exploration of smaller-than-needed prospects has left Shell failing to find more oil and gas than it pumps out of the ground each year.”

By THE ASSOCIATED PRESS

Posted 23 Sept 04

LONDON (AP) — Royal Dutch/Shell Group on Wednesday said it will spend $45 billion and sell off up to $12 billion worth of assets to reinvigorate its underperforming oil and natural gas business.

From 2004 to 2006, the Anglo-Dutch energy giant will spend $15 billion a year on its portfolio of assets. Of that, executives said at a strategy presentation here, $11.5 billion will be spent on the group’s upstream assets — exploration and production, and gas and power.

Shell — which is 60 percent held by Royal Dutch Petroleum of the Netherlands and 40 percent held by Shell Transport & Trading of Britain — repeated that it is considering all options to improve corporate governance, including a possible unification of its twin boards under a single chief executive.

But Shell executives once again deferred an update on an overhaul of the Anglo-Dutch group’s corporate structure. Shell watchers have been eager for an update on possible changes to the group’s century-old corporate structure following this year’s reserves scandal.

The company also said it will aim for oil projects that cost up to $25 a barrel to extract, up from $20 a barrel, on a bet that higher oil prices are here to stay. The company will continue to screen projects around $20 a barrel.

Shell will also look for value-adding acquisitions, but didn’t say what cash resources it had set aside for this.

In terms of exploration, the company said it will focus on locating opportunities with a minimum of 100 million barrels of oil equivalent. It targets 15 to 20 of these wells a year.

“Replacing our reserves is a priority to support future growth,” Shell said.

The company says its proved reserve replacement ratio is expected to average at least 100 percent for the period 2004 to 2008.

Years of under-investment and scatter-gun exploration of smaller-than-needed prospects has left Shell failing to find more oil and gas than it pumps out of the ground each year.

It said its production for 2004 would be between 3.7 million and 3.8 million barrels of oil equivalent a day. This widens to 3.5 million to 3.8 million in 2005-2006. But production is expected to grow to between 3.8 million and 4 million in 2009.

Its exploration and production operation is targeting a further $5 billion of divestments, dilutions and swaps from 2004 to 2006.

For its downstream business, Shell said it will unify its oil products and chemicals business under one management team.

It also said that after an unsolicited approach, it is considering the sale of its downstream global liquid petroleum gas distribution and marketing business. Talks are at a preliminary stage, it added.

Also during the 2004-2006 period, Shell expects its sales of underperforming and noncore assets to raise $10 billion to $12 billion. For 2004, cash from divestments are expected to top $4 billion.

During the past year, Shell has sold service stations and stakes in refineries from Japan to Portugal to Peru.

Sales from Shell’s liquefied natural gas business, which grew 13 percent from 1999 to 2004, are expected to grow by 10 million metric tons a year for 2004.

The company said its total debt at the end of 2004 is expected to be around 14 percent to 15 percent.

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