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UpstreamOnline: Shell enjoying its spot in the sun

These are interesting times for large international oil companies with the enormous opportunities and elephant traps graphically on show with $100-plus per barrel oil and a share meltdown on Wall Street.

In the middle of all this was Shell chief executive Jeroen van der Veer giving his annual strategy update and highlighting the enormous and long term wealth inherent in the company’s portfolio, which is itself in a state of considerable change.

Even some of the traditional terminology is moving on to a different stage. Instead of the emphasis on “reserves” we had endless reference to “resources”. As much as there was talk of the Middle East and Russia, there were references to new “heartlands”, such as Canada and even Sweden.

There was even a role for a female executive to speak alongside the traditional masculine make-up while Van der Veer himself seems refreshed, more at ease.

There is no doubt that this Anglo-Dutch behometh that drove itself off the rails in 2003 with the reserves scandal is enjoying a certain place in the sun, while arch-rival BP continues to struggle.

Shell claims to have the most ambitious programme of any of its peers in the energy sector. Certainly it has outsmarted BP for once by building a portfolio of unconventional projects, such as oil sands, gas-to-liquids and liquefied natural gas.

In the past, these expensive schemes seemed rather peripheral but in a world of stretched resources and surging oil prices Shell looks right on the mark.

The oil sands are increasingly being given a pride of place by Shell and are being expanded. Energy efficiency has been improved dramatically but that will not get it off the hook entirely with environmentalists.

The company is still sensitive to the issue of reserves replacement following the punch-up with the US Securities&Exchange Commission (SEC) in 2004 over the “lost” reserves. The Athabasca oil sands are not recognised by the SEC and the untangled reserves replacement ratio at Shell fell from 158% in 2006 to 17% in 2007. Not a happy picture even though those numbers are complicated by all sorts of factors.

The total net reserves attributable to Shell shareholders look much more healthy at 11.9 billion barrels of oil equivalents, bang on line with the year before. Shell is also pressing ahead with strong positions in LNG and is looking at the potential of various “tight” gas projects.

That is not to say these unconventional projects are not without considerable risks. The rates of return are much lower and if the Wall Street crash turned into a serious economic slump then crude prices could come tumbling down, undermining the profitability of unconventional schemes even more.

But Shell is still playing a long game with regard to Saudi Arabia and is biding its time in both Iran and Iraq.

Ironically, it is in Nigeria one of the countries with which the company has enjoyed a very long and relatively fruitful relationship that it continues to struggle.

The future there seems as tough as ever with regard to violence, though Van der Veer claims to have some positive solution on government financing.

Shell has also built itself a small but meaningful wind business and is fired up about the prospects for its expanding biofuels operation.

With money flooding in from rocketing crude prices, oil companies can afford to take some risks, but the real trouble ahead may comes from the climate change issue. But Van der Veer seems to believe the public is more scared about the lights going out due to lack of power than seeing a premature end to hydrocarbons for environmental reasons.

He needs to be right but he also needs to show that Shell can deliver on the raft of potential it has outlined on budget and on time. Shell has not always been good at that.
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20 March 2008 00:02 GMT  | last updated: 20 March 2008 00:02 GMT

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