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Shell Wagers That Delays Will Pay Off

THE WALL STREET JOURNAL

OCTOBER 31, 2008

By LIAM DENNING

Why put off to tomorrow what you can do today? Because it might get cheaper, says Royal Dutch Shell.

The Anglo-Dutch oil major is delaying the second expansion phase of its Athabasca oil-sands project in Canada, citing cost inflation. It hopes delays at other nearby projects will ease shortages, allowing it to proceed later.

That is sensible. With oil under $70 a barrel, the timing of the decision will resurrect the debate over how high long-term prices need to be to justify expensive oil-sands development. Against that, Athabasca was kicked off in 1999, when crude was less than $20. And upstream project delays help to lift long-term oil-price expectations.

[(FILES) This file picture taken on January 31, 2008 in London shows petrol pumps at a Shell garage. Anglo-Dutch energy giant Royal Dutch Shell said Thursday July 31, 2008 its net profits jumped by a third to 11.556 billion dollars (7.409 billion euros) in the second quarter owing to record high oil prices. Net earnings on a current cost of supply (CCS) basis, excluding fluctuations in the value of inventories, rose five percent to 7.9 billion dollars in the three months to the end of June, compared with the same period of 2007. AFP PHOTO/Leon Neal/FILES (Photo credit should read Leon Neal/AFP/Getty Images)]AFP/Getty Images

Petrol pumps at a Shell garage in London.

Lew Watts, chief executive of PFC Energy, a consultancy, points out that operators in countries like Canada typically own a license to develop a field, giving them flexibility over investment decisions. In contrast, developing countries tend to use “production-sharing contracts” with set time limits, meaning delays curb realized reserves and output.

Practically speaking, therefore, it is easier for Shell to ease off in Canada during a period of uncertainty than in many other countries.

Meanwhile, Shell might get more bang for its bucks in another unconventional fuel: “tight” natural gas. It has spent $6.2 billion in 2008 already to acquire North American tight gas assets.

Valuations of smaller exploration and production companies have collapsed. Credit Suisseanalyst Jonathan Wolff reckons the group trades at an average of 60% of the net asset value of proven reserves. Shell might do well to take time out from the sandbox and go shopping.

Write to Liam Denning at [email protected]

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