Royal Dutch Shell Plc  .com Rotating Header Image

Energy giants battle to pump profits

Screen Shot 2013-11-13 at 07.38.22At 55, Van Beurden, who replaced Peter Voser earlier this month, is a 30-year veteran at Shell where his career has mainly been focused on managing downstream businesses such as refining and chemicals. This week, as he announces full-year earnings, City analysts expect him to unveil details of a potential $15bn to $30bn (£9.1bn to £18.1bn) garage sale… Shell has a reputation for gluttony when it comes to tackling giant energy projects, betting billions of dollars on strategic investments aimed at building reserves and capturing future demand decades in advance. Those days may be over.

Screen Shot 2013-11-01 at 00.15.55

By 8:00PM GMT 25 Jan 2014

On the face of it, Royal Dutch Shell’s new chief executive, Ben van Beurden, and Bob Dudley, his counterpart at BP, are a world apart.

At 55, Van Beurden, who replaced Peter Voser earlier this month, is a 30-year veteran at Shell where his career has mainly been focused on managing downstream businesses such as refining and chemicals.

This week, as he announces full-year earnings, City analysts expect him to unveil details of a potential $15bn to $30bn (£9.1bn to £18.1bn) garage sale, signalling a new era of capital discipline and streamlining at the Anglo-Dutch supermajor.

Shell has a reputation for gluttony when it comes to tackling giant energy projects, betting billions of dollars on strategic investments aimed at building reserves and capturing future demand decades in advance. Those days may be over.

By contrast, Dudley is a relative newcomer at BP. The 58-year-old American oil man only joined the British company in the wake of former chief executive Lord Browne’s takeover of Amoco in 1999 and, once through the door, spent most of his time running the old TNK-BP venture in Russia.

Known to be “thick-skinned” – BP declined to comment on claims in a recent New Yorker magazine article that he believed he was being poisoned while in Russia and fled the country fearing arrest – he was elevated to chief executive in the aftermath of Tony Hayward’s awkward handling of the calamitous Deepwater Horizon rig blow-out in the Gulf of Mexico. He has spent the past four years restructuring BP and selling off assets to pay for legal costs and compensation.

Both men are grappling with the same issue: how to confront structural changes that are transforming the global energy industry.

Both are also dealing with the fallout from decisions taken by their predecessors.

For Dudley, that means concentrating on damage limitation in the Gulf of Mexico and ensuring the company has enough cash on hand to cover the cost. Van Beurden must also make some big decisions on which assets the company can afford to offload and on its future direction; the development of shale oil and gas resources in the US is reshaping energy markets in ways that could challenge the long-term viability of some of its strategic investments.

Former colleagues say that, while Van Beurden may have little upstream exploration and production experience, he is the right man to rein in Shell’s exposure to giant, technically difficult energy projects, initiated when Sir Philip Watts was chairman more than a decade ago.

This addiction to spending on major projects, which started to ramp up under the tenure of Jeroen van der Veer, from 2004 to 2009, continued under Peter Voser. In his final year in charge, capital expenditure surged 50pc to $44.3bn.

“I think that Shell is in good hands once again,” a former senior company executive told The Telegraph. “There’s no doubt we lost our way a bit in the 1990s, with too much emphasis on the short term and Phil’s [Sir Philip Watts’] pressure for reserves did lead to individuals stretching the boundaries too far.

“But Shell’s portfolio looks quite good today and a readjustment for Ben to make his mark is no bad thing. Better things will almost certainly follow.”

Shell’s fourth-quarter earnings, to be delivered on Thursday, are expected to show a 70pc drop in profits to around $2.2bn and full-year earnings of around $16.8bn, compared with $27.2bn in 2012.

The company has blamed last year’s poor performance, which Van Beurden admitted was “not what I expect from Shell”, on a mixture of poor refining margins and cost blow-outs on some major projects, including its offshore exploration programme in the Arctic.

“We think the new CEO will take the right steps to turn around the business,” wrote analysts at Credit Suisse.

The streamlining began last week when Van Beurden said the company was already making “hard choices” as he announced the sale of an 8pc stake in the Wheatstone and Iago gas fields offshore Western Australia and a 6.4pc interest in the associated liquefied natural gas (LNG) project to Kuwait Foreign Petroleum Company for $1.13bn.

Shell has the biggest footprint in global LNG of any international oil company, an exposure that has worried some analysts. Cleaner-burning natural gas now accounts for a greater share of Shell’s total production than crude oil.

Van Beurden also displayed his fiscal prudence last month when he is understood to have played a key role in Shell’s decision to abandon plans to build a $12.5bn gas-to-liquids (GTL) factory in Louisiana.

The company already operates the world’s biggest GTL plant in Qatar, which it built in the last decade at a cost of around $18bn.

The boom in shale gas production in the US has led to prices for natural gas plummeting in the world’s largest economy, although this has been largely offset by strong demand from Asia. Shell’s own efforts to tap into the US shale boom have been problematic – its fracking in the Eagle Ford shale in Texas has been largely unsuccessful.

“Shale gas is changing the dynamics of the gas world, and with it, the assumptions that underlie many investment strategies,” say Bain & Company. “Prior investments predicated on a view of gas shortfalls in the US that led to LNG import facilities have since become stranded.”

In 2003, US energy secretary Spencer Abraham and Federal Reserve chairman Alan Greenspan called for an increase in LNG imports to help offset declining North American gas production, spurring a rush by international oil companies to build new processing plants.

Some have suggested that the decisions Shell made over the last decade to expand its already significant portfolio of LNG projects are now less appealing for investors due to US shale, but the company remains convinced it has the right gas strategy.

Shell was one of the first major international oil companies to realise the full commercial potential of the technology, which involves freezing natural gas into a liquid for transportation to markets by ocean-going tankers. As long ago as 1964, it started importing small volumes of gas from Algeria into the UK through Canvey Island in the Thames estuary.

“Global LNG demand growth is expected to almost double from 2010 to 2020,” says a Shell spokesman. In 2012, the company said that its earnings from integrated gas were more than $9bn and around $7bn in the first three quarters of 2013.

Although Shell remains bullish on the prospects for LNG, analysts are growing concerned by the wider ramifications of its profits warning, and a possible fall in oil prices this year, for the wider sector and specifically the other UK major, BP.

“Royal Dutch Shell’s rare profit warning is likely to change the perception and cautiousness of investors in the sector, and therefore prepare for further downward revision for the sector,” said AlphaValue analyst Alexandre Andlauer in a note to investors prior to this week’s earnings announcement.

Next week, it will be Dudley’s turn to present the market with BP’s full-year numbers. The consensus view among analysts is that the company, which has fallen behind Shell in terms of market value, will reveal profits in the fourth quarter of around $2.7bn, down from $3.9bn a year earlier.

Despite some recent successes, most notably a multi-billion-dollar deal last month to bring gas into Europe from the Shah Deniz field in Azerbaijan, the focus remains on raising capital to cover the final bill for the Macondo oil well disaster in the Gulf of Mexico.

Although the company has already pulled in close to $40bn in a fire sale since 2010, Dudley is targeting a further $10bn worth of asset disposals over the next two years.

“In a capital-intensive industry, we remain concerned about the capital that BP has left to pay Macondo costs, while peers have been able to invest,” said Credit Suisse in a note to investors ahead of earnings.

“Eventually, if BP plays to its historical strengths, the rate of growth should become more ‘normal’, but this may come with a relative lag as investments have only recently started to pick up after a period of lull.”

The company has capped annual capital expenditure at $27bn through to 2020 and, in a television interview in Davos last week, Dudley signalled this cautious approach would continue.

Analysts agree this makes sense while President Obama’s administration keeps its “boot heel on the throat” of the 105-year-old British company, which has already paid out around $27bn for the worst oil spill in US history.

The perception that BP has been permanently crippled by the disaster is overstated, however. The company produces 3.2m barrels a day of oil and gas equivalent, its shares account for 5pc of the weighting on the FTSE 100 and it has a significant global presence.

Although its upstream business will probably be constrained in the US for many years, BP has recently enjoyed success in areas as diverse as Angola and Norway.

In the Middle East, the world’s richest hydrocarbons basin, it continues to be a major force, even though its historic concession agreement in Abu Dhabi has recently expired.

In Iraq, BP accounts for about half the country’s production of crude from the giant Rumaila field. Its huge reserves and poor infrastructure mean that BP can maximise output with modest levels of investment compared with “greenfield” projects elsewhere.

“Iraq recovery of costs is rapid, within the year,” says Michael Townsend, BP’s senior vice-president for Russia and Iraq. “This, along with a large number of barrels, provides the compensation mechanism for the relatively low fee per barrel. In more traditional, production-sharing contracts payback from inception can take over a decade.”

Short-term gain in a long-term game – a recipe both Ben van Beurden and Bob Dudley need to serve up to their shareholders.

SOURCE

RELATED TELEGRAPH ARTICLES

This website and sisters royaldutchshellgroup.com, shellnazihistory.com, royaldutchshell.website, johndonovan.website, and shellnews.net, are owned by John Donovan. There is also a Wikipedia segment.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Comment Rules

  • Please show respect to the opinions of others no matter how seemingly far-fetched.
  • Abusive, foul language, and/or divisive comments may be deleted without notice.
  • Each blog member is allowed limited comments, as displayed above the comment box.
  • Comments must be limited to the number of words displayed above the comment box.
  • Please limit one comment after any comment posted per post.