Gulf Times - 7/5/2006
Royal Dutch Shell, Europe’s second-largest oil company, said it will make a final decision on a $6bn plan to make fuels from Qatari natural gas this year as rising costs force it to reconsider some projects.
The company said yesterday it may not meet a target of replacing all the oil and gas it pumps from 2004 to 2008 because rising costs and materials are forcing it to hold back on some longer-term projects.
Chief executive Officer Jeroen van der Veer declined to specify which projects the company was reconsidering.
The Hague-based Shell is completing its studies of the project, whose costs have increased by at least a fifth to $6bn in two years, and expects to make a final decision later this year, Van der Veer said yesterday in a conference call.
“The costs in the Middle East have gone up,” Van der Veer said “This new gas to liquids project is in the Middle East, that’s exactly one of the reasons why we do those detailed studies and we stick to the final investment-decision date.”
Shell, the world’s third-largest oil company, had plans for the Qatari venture to be a cornerstone of its turnaround after admitting in 2004 that the company had misled investors for years about its reserves.
Shell has failed to contain costs at a $20bn project in Russia’s Far East and last year ran over budget at a $3.6bn offshore field in Nigeria called Bonga.
Shell, struggling to replace its aging oil and gas fields, said new developments may fail to keep pace with the rate of production for the next three years, signalling its reserves may fall further.
Projects may be delayed because of short supplies of materials and rising prices for contractors and related services, van der Veer said. Meeting a goal of replacing 100% of the oil and gas pumped from its fields from 2004 to 2008 is “less likely” as a result, he said.
Van der Veer said a push into so-called unconventional oil developments, including Canadian oil sands, hinders efforts to prevent a further drop in reserves under US Securities and Exchange Commission rules.
“I’m not the most optimistic on Shell,” said Jason Kenney, an analyst at ING in Edinburgh, who has a “hold” rating on Shell shares. “This is a legacy of under-investment, the reserves issue and Philip Watts. They are investing for the next commodities cycle.”
The outlook yesterday came after The Hague-based Shell reported first-quarter net income rose 3% to $6.89bn, or $1.05 a share, from $6.68bn, or 99 cents a share, a year earlier. (See Page 18)
Shell’s stock has gained 5.4% this year, lagging behind a 9.8% advance at BP, Europe’s largest oil company. Shell is the second largest in Europe.
Shell replaced about 67% of its reserves last year, and about 19% in 2004. As oil deposits become harder to find, Shell is increasing investment in non-conventional oil resources.
The company’s Shell Canada business, in which it has a stake of about 78%, extracts extra-heavy crude from tar-like reserves in Alberta.
These next-generation projects, such as making diesel fuel from natural gas, may not qualify as “proved” oil and gas reserves under SEC rules, the company said in today’s statement.
“We are not sure if gas-to-liquids are bookable under SEC rules,” chief financial officer Peter Voser said. “We need to highlight to our investors that we are optimising all our resources, not just those which are bookable under SEC. We are not taking an investment decision based on SEC reserves.”
Investment plans at 50 major projects have the potential to add as much as 20bn barrels of oil equivalent by the end of the decade to Shell’s overall oil and gas resource base of 60bn barrels, the company said. That 20bn barrels is about 15 years worth of Shell’s current production.
Shell’s “proven” reserves, a stricter definition that denotes more certainty of extraction, were 11.466bn barrels at the end of 2005, including its share of equity-owned investments, down from 11.882bn barrels at the end of 2004, using SEC accounting rules.
BP’s proven reserves were 17.893bn barrels at the end of last year, using SEC rules, and its replacement ratio was 95%.
Shell will spend more to find oil, with capital expenditure rising to about $21bn in 2007, compared with $19bn this year, the company said. Production is targeted to rise to between 3.8mn barrels of oil equivalent and 4mn barrels of oil equivalent in 2009.