Clear The Air Energy Blog Rotating Header Image

Telegraph: Shell’s gas gamble has left a sour taste

from the Daily Telegraph:

Shell’s commitment to LNG came at a time when natural gas spot futures were trading above $17 per unit compared with around $4 today.

Just two weeks into his tenure, Royal Dutch Shell chief executive Ben van Beurden has had the tough job of delivering the oil major’s first profits warning in a decade. The last time Shell, a bellwether for British investors expecting reliable returns, provided such disturbing guidance it was Sir Philip Watts and the scandal over misstating the company’s oil reserves at fault.

Mr van Beurden has found himself in a similar position to his predecessor, Peter Voser, in having to deal with the consequences of strategic decisions made by previous hierarchies at the Anglo-Dutch company. Shell said that it expects earnings in the fourth quarter to be 70pc lower at $2.2bn (£1.34bn), but the scarier figure was the blowout in capital expenditure to $44.3bn.

Shell has pressed on with expensive high-risk projects, such as drilling in the Arctic, when some analysts would have preferred to see more capital restraint from management. The company is gaining an unwanted reputation for placing big strategic bets with investors’ money that don’t always pay off. Its significant investment into liquified natural gas (LNG) production and the more exotic gas-to-liquids (GTL) processing are perhaps good examples.

Jeroen van der Veer, former chief executive, and Linda Cook, then gas head, aggressively continued to commit Shell to expensive LNG ventures aimed at capturing the US market at a time when gas prices on the east coast of America were only expected to climb higher. At around the same time, Shell rushed into building the world’s largest GTL plant in Qatar at a huge cost of $19bn when rival Exxon Mobil cancelled a similar scheme after deeming it too much of a risk.

The company’s commitment to LNG came at a time when natural gas spot futures were trading above $17 per unit compared with around $4 today. More than any other major oil company, Shell miscalculated the dramatic changes that shale gas and oil development in the US would have on energy markets. Although much of its LNG heads to thirsty consumers in Asia, where it commands a higher price, the company is yet to see its bet on refrigerated gas pay off.

To be fair, gas wasn’t the issue that Shell chose to raise on Friday. Higher exploration costs and underperforming refining businesses were at the heart of the problems, along with fuel theft in Nigeria. The company is also sitting on significant non-core assets that soon could be up for sale, including those in the North Sea. These could raise between $15bn and $30bn for new investments, or cash to return to shareholders.

Mr van Beurden will have to think carefully before deciding what to do with the money, as it may be some time before the big bets on LNG and GTL placed almost 10 years ago pay off.

17 Jan 2014

Leave a Reply

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

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>