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Champagne bottles to be uncorked at Shell HQ

Printed below is an English translation of an article published today by the Dutch Financial Times, Financieele Dagblad

Shell is hoisting arch-rival ExxonMobil in the neck

Bert van Dijk • Entrepreneurship: 

A few more weeks and the champagne bottles can be uncorked at Shell headquarters. Then the British-Dutch oil and gas multinational for the first time in decades again greater in terms of market value than arch-rival ExxonMobil. At least, if the current price development at both companies continues at the current rate.

Where Exxon has had to deal with setbacks that have affected production, results and returns in recent years, investors are actually charmed by Shell’s growing cash flow, his lucrative oil and gas projects in the deep sea near the US and Brazil, the big financial discipline and cost savings. Important also: an announced share repurchase of $ 25 billion in the period up to the end of 2020.

The goal of Shell CEO Ben van Beurden to become the best company in the sector for investors seems to be within reach. Shell is finally the boss of the uncrowned king of the oil industry. And that while Exxon was more than twice as big as Shell three years ago.

Surprising joint ventures

Exxon and Shell work all over the world and, in addition to each other’s rivals, have also become partners in sometimes surprising joint ventures. As in California, where both companies will jointly build one of the largest solar power plants in the US. This will soon produce steam and electricity with which the last remaining oil can be extracted from one of the oldest and largest oil fields in the US.

The project simultaneously illustrates the past and the future of the oil industry. A future that Shell and Exxon anticipate differently. ‘Shell’s oil and gas reserves have an average lifetime of 9 years, Exxon’s 14 years’, says Jilles van den Beukel, who worked for Shell as a geophysicist for 25 years and is now an independent scientist. ‘The question at Shell is how to get rid of it in the long term. The low reserves of Shell are really a problem, because it is the future of the company. ‘

In part, the low reserves may be a conscious choice. ‘Van Beurden focuses more on liquefied gas, the production of fuels and chemistry, the branch from which he himself came from. But partly the low reserves are the result of a poor track record in Shell’s exploration, despite billions of dollars in investments. It was one of the reasons to take over the British BG Group in 2016 and thus buy reserves’, says Van den Beukel.

Exxon increases investments

The outlook for finding new large oil and gas finds for Shell is no better for Shell. Shell’s exploration budget has been brought to a historically low level during the past quarter. In the past quarter, Shell spent € 230 million on detecting new oil and gas, the lowest investment of the past 14 years. For Shell, debt reduction, dividend and buying back own shares are much more important at the moment.

Exxon currently feels nothing for a large share buyback and increases investments in the coming years, fueled by recent exploration successes. ‘Look at the discoveries at Guyana, where Exxon itself has done one of the largest oil finds of the past decades,’ says Van den Beukel. ‘Since 2015, ExxonMobil has drilled eight exploration wells of which seven were successful, an unprecedented high success ratio. Exxon believes more than Shell in a future where oil will be needed for a long time. ‘

Exxon therefore bets on a long fossil future, while Shell concentrates on maximizing profit from existing activities. For Exxon, the company must see the current temporary difficult period come through if it is to be successful in the long term.

Failed guess in Russia

The weakness of Exxon is due, among other things, to a failed gambling in Russia. The group invested billions of dollars in large oil and gas projects, before American sanctions came to light in 2014 and a large part of these projects came to a standstill.

Despite, according to some, very low reserves, Shell seems to be the ‘winning’ hand in the financial world. Moreover, according to Oswald Clint, who is following Shell for investment bank Bernstein, those reserves are less important than many people think.

According to him, there were also worries about Shell’s reserves in the 1970s, which at that time were among the lowest in the sector. But Shell therefore focused on maximizing the profit from the trade of barrels of oil. Successfully. ‘Today, the LNG branch, ie liquid gas, benefits from this trade DNA’, says Clint. According to him, it is a crown jewel within Shell. ‘And even in the New Energies branch, Shell is aiming for returns of 8% -12%, with the higher returns being achievable through trade.’

But do not write Exxon off, says Van den Beukel. The fact that investors are currently clearly on the hand of Shell does not mean that this will be the case in ten years’ time. ‘Exxon is aiming for a future where oil and therefore the oil price will continue to do well. When that happens, it is becoming increasingly expensive for Shell to find and buy oil and Exxon has an advantage. ‘

 

 

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A hundred years of rivalry

The rivalry between Exxon and Shell is one of the largest in the international company history and has been going back more than 100 years. At the beginning of the last century, both companies were fighting each other for market share, including in Asia. Standard Oil, the forerunner of the current ExxonMobil, even made three attempts to acquire Shell. But the Dutch refused time and time again.

According to former Shell director Deterding, ‘it was not wise for Standard to buy us. I dream […] and I believe that our goal is to become the only opponent and therefore the silent partner of Standard. There is no place for a monopoly on this world, but for two large companies that work wherever possible, ‘he wrote in 1907, according to the book’ History of Royal Shell ‘by Joost Jonker and Jan Luiten van Zanden.

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