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  1. Analysis
October 1, 2014

Shelling In – what assets will bring shell back on top?

As Shell tries to raise $15 billion in asset sales, Paul French examines the offshore activity that will help bring the company back into favour with investors

By Heidi Vella

The year didn’t start well for Royal Dutch Shell. With net profits down 39% in 2013, the company was forced to issue its first profit warning in a decade as it struggled to deliver attractive returns to investors in the face of flat oil prices and high costs.

“There was a bit of a headwind at Shell going into 2013,” explains Raymond James analyst Betrand Hodee. “The North American strategy and the downstream business were clearly not performing as expected.”

Shell’s solution has been to go back to basics. Under the supervision of new CEO Ben van Beurden, appointed in January 2014, the strategy for turning the company around has been to focus on achieving greater capital efficiency. A key part of that plan is raising money through sales, with $15 billion worth of assets scheduled for divestment before the end of 2015.

Selling of Australian assets

Before van Beurden had even gone public with his plans to make Shell more efficient, the company sold off its stake in the Australian Wheatstone LNG project to Kuwait Petroleum for $1.1 billion.

That was quickly followed by the sale of $2.6 billion worth of refinery and gas stations in the region to Vitol and the $5.7 billion sale of its 78.3 million shares in Woodside Petroleum Ltd to the company’s investors.

“Shell will remain a major player in Australia’s energy industry,” van Beurden said in a statement following the Wheatstone sale. “However, we are refocusing our investment to where we can add the most value with Shell’s capital and technology.”

He later spelled out that Shell’s policy for Australia would be to concentrate on directly owned assets.

Breaking loose of Brazil

Another early move came in January in Brazil, where Shell sold off a 23% stake in its Parque das Conchas oilfield – also known as BC-10 – to Qatar Petroleum International Ltd for $1 billion. The deal means Shell still hold a 50% stake in the field and will continue to operate it.

“What Shell have done so far is sell off assets they’ve only recently bought,” says Betrand Hodee. “They’d only had Wheatstone for a couple of years and BC-10 for even less – I think they sold that stake a year after they bought it. It’s all part of the new CEO’s roadmap to create more capital discipline.”

North Sea – extending the life of Gannet

February saw the announcement of three major sales in the UK zone of the North Sea. Manned floating production, storage and offloading (FPSO) installation Anasuria, the Nelson platform and the Sean bridge-linked platform installation were all put up for sale, although as yet no buyers have been found.

“The UK is an important business region for Shell, and our investment strategy continues to focus on assets where we see an opportunity for growth using our world-class technological know-how,” says Glen Cayley, vice president of Upstream Shell UK and Ireland.

“February saw the announcement of three major sales in the UK zone of the North Sea.”

“We are focusing and strengthening our portfolio for the decades ahead with many exciting projects such as new wells we are drilling at Shearwater, our investment in extending the life of Gannet, our investments in the non-operated ventures of Schiehallion and Clair and our purchases, last year, of a further interest in Beryl and the Curlew FPSO vessel.”

Exploration – halting Arctic project

Simple supply and demand suggests that after raising money through sales, the other way of becoming more cost efficient is to spend less. That’s why, amongst other readjustments, Shell has abandoned its controversial plans to drill the Alaskan Arctic this summer in order to curb costs that had spiralled past $5 billion by the beginning of 2014.

“Shell will clearly re-asses its exploration strategy,” says Hodee. “The last two years has seen very, very poor results after some huge expenditure in North America.

“French Guyana was also a disappointment after the initial discovery and there has been mixed results in the Gulf of Mexico. They announced last week they’d make a significant discovery there but to me, 100 million barrels is not significant.”

Future plans – divesting and investing

Just over halfway through 2014, Shell can be said to have made a good start along the road to recovery. There’s $10 billion in the bank from sales in Australia and Brazil, a for-sale sign is up over aging assets in the North Sea and spending on exploration is being rationalised. So what’s next on van Beurden’s quest to make the company more streamlined?

“I think they’ll follow a fix and divest strategy,” says Hodee. “Assets that aren’t performing or that require a big investment to improve performance will be divested. I’m sure there will be some activity in North America and the North Sea but the problem they’ll have is that there aren’t currently many buyers around.

“Capital efficiency is now a model across big oil and some of the production costs involved in Shell operations are huge. In the North Sea for example, it costs them $18 to produce a barrel of oil compared to $7 per barrel in 2005, so it isn’t necessarily that attractive a proposition for buyers.

“Ultimately, these big oil companies are too big. They need to be more focused on specific areas of their portfolio. I doubt Shell can pursue a new energy development in Russia at the same time as new LNG opportunities in Canada and the US. Experience has proven that when they try to do too many things, it’s hard to keep control of the costs so they’re going to need to make some hard choices moving forwards.”

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