Shell falls in upstream and downstream oil production following an aggressive program of asset sales, and a reserves replacement ratio of just 27% for 2017, but tried to soothe investors with what it called a “strong financial performance” after the oil price plunge and acquisition of BG.
Shell reported a 7% year-on-year fall in its upstream production unit, which excludes the LNG-focused Integrated Gas unit, for the fourth quarter, with liquids production falling by 11% to 1.54 million b/d.
According to the International Oil Company (IOC), asset sales in the North Sea, Canada and Gabon contributed to the reduction, and divestments will have a further impact amounting to 270,000 b/d of oil equivalent in the current quarter. The company booked $6.5 billion of asset sales just in Q4, and $17 billion for the whole of 2017, part of a drive to sell $30 billion of assets in 2016-18 that has already almost been completed.
The Integrated Gas unit to some extent offset upstream production reductions, with liquids production in the unit increasing by 3% to 229,000 b/d in Q4 compared with a year earlier, and gas by 10% to 4.36 Bcf/d. In the downstream, Shell’s refining throughput fell by 4% year on year in Q4, and 5% for the full year 2017, to 2.59 million b/d and 2.57 million b/d, respectively, mainly due to the sale of the Port Dickson refinery in Malaysia. Shell added that maintenance would also lead to lower refining availability in the current quarter compared with a year ago.
In a preliminary reserves statement, Shell reported a drop in reserves to 12.2 billion boe, from 13.2 billion boe at the end of 2016, giving the company a “reserves life” of just under nine years. The multinational Chief Financial Officer, Jessica Uhl posited that Shell’s jettisoning of its Canadian oil sands during the downturn cost it 1.2 billion barrels of reserves.
However, the Chief Executive Officer of Shell (CEO), Ben van Beurden noted that the IOC was not overly exercised by reserves numbers compiled under the “very stringent” rules of the US Securities and Exchange Commission. These tend to play down the full extent of some resources, particularly shale and the deepwater resources Shell obtained with its $54 billion acquisition of BG in 2016, notably in Brazil. Not including the effect of asset transactions Shell had a reserves replacement ratio of 127%, rather than 27% in 2017. “We have even quite a few fields operating very well with zero reserves, simply because we’re not allowed or entitled to book anything under very stringent SEC rules,” van Beurden said.
Beurden added, “I’m not particularly focused on reserves and what is more important to me is the continuity of our cash flow going forward. If I look through the 2020s, I see no issue when it comes to the continuity of our business, even on our upstream businesses. On top of it … a large and growing part of our business has nothing to do with reserves: oil products, chemicals, new energies, these things are linked to other underlying products.”
The Shell CEO made it known that Shell’s share of Brazilian production amounted to 350,000 boe/d in Q4, most of this being from deep pre-salt formations, and that a further three floating production storage and offloading vessels were due on stream in 2018, together bringing Shell another 100,000 b/d at peak. He also highlighted a decision in November establishing the “commerciality” of the Mero field, part of Brazil’s Libra area, which should start producing in 2021.
Uhl observed that greater capital efficiency, lower operating costs and improved reservoir performance had helped boost reserves by 1.8 billion barrels, partly offsetting the impact of production and of asset sales. Shell reported a relatively strong financial performance, with Q4 earnings, excluding inventory changes, almost triple the level a year earlier at $3.08 billion. Some investors were unimpressed, however, as Shell’s cash flow from operating activities decreased in the Q4, both compared with a year earlier and Q3.
The company’s debt ratio, or gearing, which had shot up with the BG purchase, fell less than some commentators had expected, standing at 24.8% at the end of 2017, compared with 25.4% at the end of Q3, partly reflecting a $1.1 billion charge relating to US tax changes.
Van Beurden was optimistic about business conditions expressing confidence that there was no sign of a glut in the LNG market, in which Shell has invested heavily, and he expected oil prices to move higher, without a “disruptive spike.”
He also disclosed that OPEC production cuts and a reticence and discipline in investment by oil companies were helping tighten the market, but US shale producers were also demonstrating a more measured approach, with “much more rational economic behavior.”
According to the Shell boss “My expectation and hope is that yes of course we will see strengthening of the oil price, we will see a tightening of supply and demand balances, but we will also see the capacity to buffer that going forward. So at the moment I’m optimistic about the fundamentals.”