Shell’s all at sea from outages after delaying refinery overhaul

The Australian: Shell’s all at sea from outages after delaying refinery overhaul

Andrew Trounson

June 03, 2005

SHELL Australia’s decision to delay refinery overhauls in 2003 because of the war against Iraq has come back to haunt it as planned and unplanned outages last year all but wiped out profits at its refining and marketing business.

Coming at a time of strong petrol volumes last year on the back of its petrol discounting alliance with Coles Myer, the outages forced Shell to import product at a loss to cover demand.

Shell’s retail volumes jumped more than 30 per cent last year.

As the Iraq war began “we believed from a security of supply position in terms of Australia that it was wise to defer those shutdowns into 2004 and that has cost us commercially”, Shell Australia chairman Tim Warren said yesterday.

Shell Australia’s 2004 profit before interest and tax dropped 28 per cent to $587 million from $815 million in 2003. Earnings from the downstream refining and marketing business tumbled to a paltry $4 million from $183 million a year before.

For commercial reasons, Mr Warren wouldn’t quantify the losses from shutdowns and imports, but given higher refining margins and sales he said he would have ordinarily expected a “very good result”.

On the back of the Coles alliance, Shell was able to narrow the gap with market leader Caltex, raising its petrol market share to around 23 per cent from 17 per cent. In February, Caltex reported a 77 per cent rise in 2004 net profit to $353 million.

Mr Warren was bullish on the prospects for 2005 with his refineries on track to meet production targets and the Coles alliance translating into strong sustained volumes.

He said Shell was on track to complete a $340 million upgrade of its refineries to meet new clean-fuels requirements from the start of next year, with projects tracking within budget. In April, Caltex warned of a $100 million cost blow-out on its clean-fuels upgrades because of rising labour and material costs.

Profit before interest and tax from the upstream oil and gas business fell almost 8 per cent to $583 million. Profit was weighed on by lower production from declining Laminaria and Corallina oil fields in the Timor Sea, and a 12 per cent rise in the Australian dollar against the US dollar which cut exports returns.

Shell said it and its partners in the massive North West Shelf liquefied natural gas project, operated by Woodside, were on track to approve later this month the construction of a fifth processing train that would increase capacity to 15.9 million tonnes a year from a newly expanded 11.7 million.

First production from the new train is expected in 2008 and the project and associated infrastructure is expected to cost about $2 billion.

Shell said the Sunrise LNG gas project in the Timor Sea, which also includes Woodside, continued to be held up by ongoing talks between Australia and East Timor to reach a production-sharing regime.

While Mr Warren said feedback from the talks was encouraging, Shell believed it would be the end of the decade before Sunrise came into production.

But Mr Warren said the staggering of the train five and Sunrise projects was in some way a blessing since a shortage of skills and materials would likely stretch available resources if the two projects overlapped.

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