Shell outlines tighter upstream, refining footprint in post-COVID transition plans

Reporting stronger than expected third-quarter earnings, Shell said it wants to pursue more “value over volume” by simplifying its upstream assets to nine significant core positions; Brazil, Brunei, Gulf of Mexico, Kazakhstan, Malaysia, Nigeria, Oman, Permian and UK North Sea. It said combined the areas will generate more than 80% of its upstream cash flow from operations.

Downstream, Shell said it expects to transform its current fourteen refining sites into six “energy and chemicals parks” at Deer Park (US), Norco (US), Pernis (NL), Pulau Bukom (Singapore), Rheinland (Germany) and Scotford (Canada). In July, Shell said it wanted to reduce its downstream footprint to 10 sites “over time.”

Shell, Europe’s biggest energy major, also announced a surprise dividend increase and plans to cut its debts under a new cash allocation framework, noting that spending cuts in response to the pandemic earlier this year have strengthened its financial resilience, allowing for “the acceleration of strategic plans.”

“We must continue to strengthen the financial resilience of our portfolio as we make the transition to become a net-zero emissions energy business,” CEO Ben van Beurden said in a statement. “Our sector-leading cash flows will enable us to grow our businesses of the future while increasing shareholder distributions, making us a compelling investment case.”

As part of the strategy outlook, Shell said it also plans to extend its leadership in the liquefied natural gas (LNG) markets.

Like many of its oil major peers, Shell has prioritized lower-cost upstream assets in recent years, selling off parts of its legacy portfolio and investing in large-scale gas assets and high-margin deepwater and US tight oil acreage.

Last year, Shell said it was targeting average forward-looking breakeven prices of around $30/b in its upstream businesses after asset “high-grading” has doubled its portfolio of sub-$40/b breakeven projects since 2016.

Shell said it will continue the relentless “high-grading” of its upstream portfolio with expected divestment proceeds of $4 billion a year on average in the coming years.

Shell, which cut its capital spending budget for this year in March from around $25 billion to $20 billion, said it is planning for an annual cash capex budget of between $19 and $22 billion “in the near term.”

The company said it plans to present a more comprehensive strategy update and full financial outlook in February 2021.

Third-quarter

Shell reported an 80% slump in adjusted earnings for the third quarter of 2020 to $955 million, as it continues to suffer from lower prices and output as global demand suffered from the COVID-19 pandemic. The result, however, was well above consensus estimates of a $42 million adjusted profit for the period.

During the third quarter, Shell saw a 14% slide in year-on-year upstream production volumes of 2.2 million boe/d reflecting OPEC+ curtailments, lower gas demand and hurricanes in US Gulf of Mexico.

It’s integrated, LNG-linked gas assets produced 844,000 boe/d in the quarter, down 12% on the year after higher maintenance and lower well performance, partly offset by the transfer in the first quarter 2020 of the Rashpetco operations in Egypt from the upstream segment. It said its LNG liquefaction volumes decreased mainly as a result of more maintenance activities in Australia.

Combined, Shell’s total third-quarter production was 3.08 million boe/d down 14% on the year.

Looking ahead, Shell said it expects its upstream production to average 2.3 million – 2.5 million boe/d and its LNG-related gas production to average 830,000 – 870,000 boe/d. LNG liquefaction volumes are expected to be approximately 7.9 million – 8.5 million mt.

“As a result of COVID-19, there continues to be significant uncertainty in the macroeconomic conditions with an expected negative impact on demand for oil, gas and related products. Furthermore, global developments and uncertainty in oil supply have caused volatility in 2020 in commodity markets,” Shell said.

Downstream, Shell saw its earnings bounce back from a loss in the previous quarter, helped by strong marketing margins and favorable deferred tax movements.

Oil product segment earnings were $2.09 billion, down 14% on the year, reflecting weaker refining margins and lower sales volumes due the COVID-19 pandemic.

Refinery utilization was 65% compared with 78% in the third quarter 2019, mainly due to lower demand and economic optimization of the plants.

Crude throughputs in the quarter slipped 22% on the year to 1.97 million b/d while oil product sales were 30% lower at 4.74 million b/d.

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