Shell confirms output targets despite US price drag
London (Platts)--31Jan2013/1040 am EST/1540 GMT
Shell said Thursday it remains on track to grow its oil and gas
production by over 20% in the next five to six years, despite weak North
American fuel prices continuing to dent the performance of its key upstream
Europe's biggest oil company also reported lower-than-expected earnings
in the fourth quarter of 2012 and said it would need to spend more on
developing its existing reserves.
In a strategy update, Shell reiterated a target of increasing its oil
and gas production to average around 4 million b/d of oil equivalent in
2017-2018, compared with 3.3 million boe/d in 2012.
A growing proportion of Shell's production will come from North America
over the period but the company said it continues to suffer from dire US gas
prices and weak Canadian bitumen values.
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During the fourth quarter of 2012, Shell said Canadian synthetic crude
realizations were 19% lower than the year before with the shale boom-caused
gas price collapse depressing gas realizations by 4% on the year.
As a result, the major posted its second straight upstream loss from the
region for the fourth quarter and warned it expects its US business to
remaining "under pressure" for the short term.
"We think the underperforming North American business is a key feature
of RDS's current business," Citi's oil analysts said in a note, "That
continued underperformance of America's upstream should start to raise
questions around the company's medium-term growth ambitions, in our view."
Speaking to reporters in London, Shell CEO Peter Voser said while income
its US shale gas and tight oil assets and Canada's oil sands have been hit by
prices, the company's deepwater Gulf of Mexico oil projects are more
"The Americas' business is a growth engine for us and that has some
implications in the financial results," Voser said. "You should expect the
Americas' results to stay under pressure because it's a macro affect."
Shell CFO Simon Henry said the company took depreciation charges of $3
billion in 2012 on its US onshore gas and oil assets which, are being hit by
the weak prices.
As a result of the US shale-driven gas price slump, the company said it
expected to report a headline proved reserves replacement ratio (RRR) for
2012 on a US SEC basis of just 44%.
Excluding the effect of prices, however, organic RRR was expected to be
around 85% for the year, Shell said, adding that its three-year average RRR
should stand at 115%.
At the end of 2012, total proved reserves on an SEC basis were expected
to be around 13.6 billion boe, after taking into account 2012 production.
Despite the low RRR last year, the company said it held 20 billion boe
of resource potential under active development with 30 new projects likely to
unlock 7 billion barrels of resources to drive its future production growth.
"Shell is on track for plans we set out in early 2012, despite headwinds
last year," said Voser. "We are delivering a strategy that others can't
The company said it still aimed to deliver $175 billion-$200 billion of
total cash flow from operations for 2012-2015, with a net capital spending
program of $120 billion-$130 billion, implying a $35 billion-36 billion
average annual organic spend over the period.
This year, Shell said it planned $33 billion of net capital investment,
up from $30 billion in 2012. The company said it saw organic capital
expenditure of $34 billion this year with some $3 billion of asset sales.
Shell said the high capex budget was justified by climbing costs,
particular in its deepwater projects, as well as higher exploration spending
over the period.
Shell said this year's spending included an increase of some $1 billion
for non-cash capitalized leases, mostly in deep water growth projects.
"The increased spending from 2012-13 will be driven by higher investment
in deep water and upstream engines, reflecting Shell's project flow, and an
increase in core exploration spending from $6.4 to $7 billion," the company
Shell said it expects to drill over 40 high-potential wells in 18
conventional basins, and test 10 key resources plays for tight gas and
The capital spending budget is based on an $80-$100/b Brent oil price
but also assumes an "improved" US gas and downstream environment from 2012,
Shell said, without providing further detail.
For the fourth quarter of 2012, Shell reported adjusted profits of $7.29
billion, up 13% from the $6.46 billion in the year-earlier period.
The major said its upstream earnings were hit by sharply lower US oil
and gas prices but saw improving refining margins in the period support
results from its downstream division.
Excluding one-time items, Shell's 'clean' earning of $5.58 billion came
in well below market expectations of some $6.5 billion for the quarter and
the company's shares fell by 2% in London trading.
Shell, which is close to seeing its gas production volumes overtake its
oil output, said production averaged 3.41 million boe/d in the fourth quarter
of 2012, up 3% from the year-earlier period.
Equity LNG sales volumes of 5.49 million mt were 13% higher than in the
same quarter a year ago. Equity LNG sales volumes reflected the contribution
from Pluto LNG and higher volumes from Qatargas 4 LNG, Shell said.
Helped by strong margins, fourth-quarter downstream earnings, excluding
extraordinary items, were $1.16 billion, compared with a loss of $278 million
in the fourth quarter of 2011, Shell said.
Refinery intake volumes were 5% higher at 2.8 million b/d in the fourth
quarter. Excluding portfolio impacts, refinery intake volumes were 8% higher
than in the same period a year ago. Refinery availability was 92%, in line
with the fourth quarter of 2011.
The company said the crude distillation unit at its expanded Motiva
refinery in Port Arthur, Texas, would be ramped up during "early 2013," after
it was restarted earlier this month.
--Robert Perkins, email@example.com
--Edited by Jonathan Fox, firstname.lastname@example.org