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    Shell Reports Crash in Profits, Defers Lake Charles

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Summary

Anglo-Dutch major Shell reported a 93% drop in current cost 2Q earnings, despite a 28% increase in upstream production thanks to its BG takeover.

by: William Powell

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Shell Reports Crash in Profits, Defers Lake Charles

Anglo-Dutch major Shell reported July 28 a 93% drop in its current cost of supplies earnings: $238mn in Q2 2016, down from $3.361bn in the same period last year. Oil and gas production however rose 28% to 3.5mn barrels of oil equivalent/day. Refining margins were also hit hard, so even that sector came in low, at $1.82bn compared with $2.96bn last year.

Senior management told reporters that this was a “transition year” following the purchase of BG and there were a lot of moving parts relating to the subsequent absorption and restructuring. On top of that there were the usual impairments, onerous contracts and write-downs in the low oil price environment, none of which the company said were material, but they all added up.

Integrated gas earnings – the greatly expanded LNG business, thanks to the Q1 completion of the BG takeover – fell from $1.4bn to $868mn, despite a 39% rise in liquefaction to 7.6mn metric tons (mt) and a 52% rise in sales, to 14.25mn mt.

Against this backdrop the company has decided to postpone two final investment decisions: CEO Ben van Beurden said that the decision to convert Lake Charles terminal into an export facility had "today" been delayed; and earlier in the month it postponed the LNG Canada project decision, which was to have been taken this year.

That was despite his assertion that the two are among the cheapest of all North American LNG projects, and his belief that LNG demand would grow in the 2020s. Hence, he said, projects that were starting up in the early years of the decade would have the advantage.

In Australia, it said its partners in Browse LNG had decided to defer that project on cost grounds but the giant Gorgon project would generate many billions of dollars annually to Shell once it was running smoothly. “It is a very strong cash generator,” the company said, even if “the capital costs had been higher than expected.” Trains one and two have been commissioned and the third train is due on stream next year. But operational incidents have meant very little production this year. Still to come is its wholly-owned Prelude floating LNG plant, whose costs have never been disclosed.

Ben van Beurden, CEO (Credit: Shell)

He said that the proposed reduction of the Groningen cap in the Netherlands this year would cut “a few hundred million dollars” from Shell’s revenues, although it would not mean having to source alternative supplies to meet Dutch marketer GasTerra’s sales commitments, so it would not cost the company. “We have supply available,” he said. He is also upbeat about gas demand in Europe, saying the region needs more stable supplies -- citing the COP 21 talks in Paris aimed at cutting carbon emissions -- and that LNG is filling that gap, with the US price being “just about attractive” although van Beurden said this was subject to change.

Divestments are on track to reach $6bn-$8bn this year, which will help lower the debt gearing from the present 28.1%. He said that $1.5bn had already been agreed – its stake in Japanese refining company Shell Showa – and four other projects would bring the company up to the target for this year. But in total there are 17 identified asset sales under discussion, hence “in the next four to five months” there will be a lot more clarity regarding its target.

The aim is to reach $30bn in the next three years but Shell may have to wait longer if the oil price remains low, or else lower its price expectations.

There has been doubt about whether Shell would sell its stake in Shell Showa to Japan's Idemitsu, but Shell now said it had the support of the economy ministry and expects the deal to go ahead once anti-trust approval has been granted. It expects that this year.

Van Beurden declined to comment in detail on the UK vote to leave the European Union and the possible second referendum on Scottish independence from Westminster. However he said the North Sea was a "pathfinder" in terms of handling mature assets, and costs had come down while reliability had gone up. However it remains a very tough environment for business. Cost-cutting by contractor Wood Group, equating to up to 30% off terms and conditions, has seen union members walk out in protest this week. This is not expected to hit production at the affected platforms, however.

 

William Powell