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Shell to Keep Shale Drilling Investment Stable Amid Gas Glut

By Bradley Olson – Mar 7, 2012 9:29 PM GMT

Royal Dutch Shell Plc. (RDSA), Europe’s largest oil company, won’t increase its spending on drilling shale fields this year due to low natural-gas prices.

“It wasn’t so long ago that gas prices were still at a level where everybody was drilling almost as fast as you could reasonably make it happen,” Marvin Odum, the president of the company’s North American operations, said in an interview today.

“Now you’re starting to see some upstream reaction to where the prices are,” said Odum, in an interview at CERAWeek, a Houston conference held by IHS Cambridge Energy Research Associates.

Surging output and a mild winter pushed gas futures to a 10-year low in New York, according to data compiled by Bloomberg. U.S. gas production climbed 6.5 percent to a record 28.6 trillion cubic feet in 2011, according to Energy Department data. Some of the largest gas producers in the U.S., including Chesapeake Corp., have announced plans to curtail gas production in response to low prices.

Shell may invest $3 billion to $5 billion in drilling shale fields, Odum said. “We’re at the lower end of that right now because of where natural-gas prices are,” said Odum.

Shell wants to increase output in liquid-rich shale areas, which produce more oil or gas-liquids such as propane, said Odum. The Hague-based company doesn’t plan to boost spending in 2012 unless gas prices rise or exploration prospects in more oil-rich formations prove successful, he said.

Adding Value

Gas for February delivery fell 5.4 cents, or 2.3 percent, to $2.302 per milllion British thermal units on the New York Mercantile Exchange, the lowest settlement price since Feb. 15, 2002. U.S. inventories were 45 percent above the five-year average for the week, the biggest gap since June 2006.

With prices for the heating fuel so low, Shell wants to wrest more value from gas by using it to produce chemicals, other fuels or turning it into liquid form for potential export, Odum said.

“We look at this from a total value chain perspective,” he said.

Shell and other companies are evaluating plans to spend almost $50 billion or more on new plants in the U.S. that can turn gas into refined products such as kerosene, chemicals or a liquid form that can fuel trucks and other pieces of the transportation fleet.

Shell is evaluating whether to build a plant in North America comparable to a $19 billion facility completed last year in Qatar that can turn gas into fuels normally produced in an oil refinery, Odum said.

He declined to say when the company will decide about a plant or where it may be build.

The petrochemical industry may spend $30 billion to build U.S. factories that convert natural gas into plastics as shale drilling has made American production the cheapest outside the Middle East, Mark Lashier, an executive vice president with Chevron Phillips Chemical Co., said in an interview March 5. Shell is studying plans to build a new plant in Appalachia.

To contact the reporter on this story: Bradley Olson in Houston at [email protected]

To contact the editor responsible for this story: Susan Warren at [email protected]


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