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THE BUSINESS: Shell’s change of tack puts it back on course

THE BUSINESS (EU): Shell’s change of tack puts it back on course

8 May 05

Black Gold: $3.2bn is earmarked to double production at Canada’s Athabasca oil sands project

ROYAL Dutch/Shell wasn’t built on a Texas gusher like most of its counterparts in the US. Instead, founder Marcus Samuel invented the first oil supertankers, using them to undercut US oil imports to Europe with crude from the Far East. The first of his designs, the Murex, made its maiden voyage in 1892 and a trading empire was born.

Today, Shell chairman Jeroen van der Veer’s task of bringing the company back from last year’s crisis isn’t unlike changing course on one of the Murex’s unwieldy successors. But the recovery story is nonetheless building momentum.

Analysts advising investors to buy the stock now outnumber those with a sell rating. Since October, when van der Veer confirmed plans to merge Shell’s two separately listed holding companies, the company has dosed its valuation gap with BP from 25% to 10%.

Partly this is because the merger, which will happen in July, will more than double Shell’s weighting on the London Stock Exchange, forcing investors who track the market to buy. Most of this buying is still to come.

There is more to it, though. For the first time in what seems an age, the good news for Shell is beginning to outweigh the bad. Thursday’s announcement that Shell had sold its Basell chemicals joint venture to Access industries, BP’s Russian partner, for $4.4bn (£2.3bn, €3.3bn) came on top of last month’s $1.75bn sale of the Intergen power business. The news has revived investors’ faith in its $12bn disposal programme.

Management changes have also helped. Investors report that Peter Voser, who took over as chief financial officer in October, has brought a sense of direction absent under his predecessor Judy Boynton. The disposals, combined with record cashflow, have raised hopes that Voser, after restarting Shell’s share buybacks in February, will try to outdo BP. Morgan Stanley says Shell could buy back $20bn of shares and still keep gearing at its 20% target. Last month’s big profits from oil refining have also turned Shell’s downstream business from a burden into an attraction.

The company’s exploration programme, after unwelcome disappointments last year, looks as if it has been more successful in 2005, with discoveries in Nigeria, Norway, the United States, Malaysia, the Netherlands, the UK and Oman.

True to the company’s birth with the Murex, though, it is new technologies rather than exploration that offer the best hopes for a revival. Last week, Shell made a triumphant return to Libya with a deal to renovate the country’s ageing liquefied natural gas (LNG) plant, gaining five exploration blocks in the country’s energy-rich Sirte basin in return. It has also applied to spend $3.2bn, doubling production at its Athabasca oil sands project in Canada. And there are signs it is close to swapping a stake in its Sakhalin LNG project for access to the Zapolyarnoe gas field it has craved since the late 1990s.

The greatest coup, though, was the deal signed in February with Qatar to build a 25-year LNG project for the country’s vast North Field.

Shell has for a decade been positioning itself as the world leader in the gas business. It has also built a position in oil sands in Canada and heavy oil in Venezuela. It is betting that as “conventional” oil becomes less able to meet global demand, gas will increasingly replace it, while the expensive process of mining and purifying “unconventional” oil reserves will make better economic sense.

BP has shunned oil sands because of low profitability. It also hasn’t chased the gas business with the same vigour as Shell, relying instead on higher-return exploration success in deep-water frontier areas such as the Gulf of Mexico and Angola and, more recently, on the potential oil and gas reserves of its TNK-BP joint venture.

No one denies BP’s exploration approach has been successful, which is why Shell has mimicked it. But deep water wells tend to produce oil at high levels for a relatively short time, meaning BP’s long-term production growth relies on repeating past glories.

Shell’s huge oil sands and gas projects, on the other hand, can produce at the same levels for decades.

Shell’s 10.2bn barrels of proved reserves will only last it 10 years, next to BP’s 14. But Shell argues its “resources” of oil and gas amount to 60bn barrels, while BP’s John Browne estimated the company had some 57bn barrels of resources.

The task of converting Shell’s “resources” back into reserves fast enough to meet its targets looks challenging. At the results van der Veer reiterated his confidence that Shell would replace 100% of the oil and gas produced between 2004 and 2008. It managed to replace less than 50% organically in 2004. Few dispute that Shell’s business falls behind BP’s and ExxonMobil’s in quality. But it’s no longer in crisis.

RICHARD ORANGE

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