Bloomberg: Shell Australia May Decide Against Refinery Spending (Update1)

By Angela Macdonald-Smith

May 11 (Bloomberg) — Royal Dutch Shell Plc’s Australian unit may decide against “major” further investment in its two refineries because of competition from larger plants in Asia, said Chairman Russell Caplan.

Shell Australia will have to consider whether it’s better to invest in larger refineries overseas when the next “major” investments are required at the Geelong plant in Victoria and the Clyde plant near Sydney, Caplan told reporters today in Melbourne. Australia’s other three refiners face similar decisions, he said.

Australia’s four oil refiners spent more than A$1 billion ($828 million) to upgrade plants to meet more stringent 2006 standards for diesel and gasoline, the Australian Institute of Petroleum estimates. Specifications are due to be tightened again for fuels in 2008 and 2009.

“Our refineries in this country are very small by world scale,” Caplan said. “When it comes time for a major investment, hundreds of millions of dollars, then there’s a decision to be made: do you invest it in an old, small sub-scale local refinery, or do you invest it in a big modern refinery in India or Singapore or somewhere and import.”

Caplan declined to say when those investment decisions may become due for Shell’s two Australian plants other than saying it won’t be within the next 12 months. Caltex Australia Ltd., half-owned by Chevron Corp., BP Plc and Exxon Mobil Corp. also own refineries in Australia. Australia imports about 20 percent of its gasoline and diesel.

`Under Review’

“It won’t be in the next 12 months, but I think it is an issue that is constantly under review,” Caplan said. “I wouldn’t think that there was any competitor in Australia today that wasn’t considering this issue.”

Singapore refining margins, or the difference between the cost of a barrel of crude oil and the price of a barrel of petroleum products, have been “relatively attractive” for the past two or three years, yet will inevitably decline as new refining capacity starts up in Asia, Caplan said.

“The second that’s on stream, the margins will reduce,” Caplan said. “I feel pretty sure that it is going to happen, and I feel that that’s something you need to watch out for when looking at the health of the downstream business.”

Profit Jump

Shell Australia reported a 36 percent increase in profit last year as the company benefited from “strong” liquefied natural gas sales.

Profit before interest and tax rose to A$1.73 billion, from A$1.27 billion a year earlier, with exploration and production contributing about three-quarters of the earnings, Shell Australia said today in a statement handed out at a media briefing in Melbourne. Shell owns a 34 percent stake in Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, as well as one-sixth of the Woodside-operated North West Shelf venture and exploration ventures.

Profit from oil and gas production jumped 38 percent to A$1.34 billion, while profit from oil refining and fuels marketing, excluding the effect of changing oil prices on the value of stockpiles, gained 33 percent to A$398 million.

Capital expenditure in exploration and production jumped 40 percent to $654.7 million due to spending on the North West Shelf venture’s LNG expansion and on the company’s “very significant” exploration campaign off the northwestern coast, Caplan said.

Exploration Wells

Shell has drilled the first two of 12 exploration wells planned in the WA-371-P exploration permit targeting large-scale natural gas discoveries that may offer potential for LNG production, said Chris Gunner, chief operating officer of Shell Development Pty, the exploration and production business. He declined to comment on the results of the wells, which lie in a permit adjacent to Inpex Holdings Ltd.’s Ichthys fields.

Shell has more than doubled its exploration and production employee numbers in Perth, Western Australia, in the last 18 months to about 200 to works on investment opportunities including Gorgon, Sunrise and Browse LNG projects, Gunner said.

Shell and its partners in the delayed, $10 billion-plus Gorgon project are “very committed and aligned” on the venture and are working to reduce the effects of “a very heated global construction market,” Gunner said. “We’re moving forward with ticking all of those boxes to get to our final investment decision.”

The Sunrise LNG partners, which include Woodside Petroleum Ltd., ConocoPhillips and Osaka Gas Co., have re-established a team to work on the project in the Timor Sea and want to make progress on the project “as soon as can be done,” he said.

Woodside Stake

Shell’s business in Australia will be increasingly weighted towards exploration and production, rather than refining and marketing, Caplan said.

Caplan declined to say whether Shell may look again at making a bid to take full control of Woodside after an earlier attempt was blocked by the Australian government in 2001.

He also declined to comment on whether Shell may be interested in bidding for Santos Ltd., Australia’s third-biggest oil and gas producer, should the South Australian government decide to remove a limit of 15 percent on individual shareholdings in the Adelaide-based company.

To contact the reporter on this story: Angela Macdonald-Smith through the Sydney newsroom at

[email protected] .

Last Updated: May 11, 2007 03:14 EDT

 

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