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Shell shelves plan to drill in Alaskan Arctic this summer Shell shelves plan to drill in Alaskan Arctic this summer
(about 17 hours later)
Shell has announced plans to slash its exploration and development spending from $46bn (£27.8bn) to $37bn this year and has ditched plans to drill in the Alaskan Arctic this summer. Shell's controversial presence in the Arctic, US shale lands and the Niger delta is in doubt after the oil group announced a sweeping strategic overhaul that includes the suspension of its Alaskan drilling programme.
The cutbacks were unveiled by new chief executive, Ben van Beurden, who said they were part of a range of initiatives to make up for what he described as Shell's "loss of momentum". Taking the knife to some of his predecessor's pet projects, new chief executive Ben van Beurden said that the Anglo-Dutch company might have gone "too quickly" into shale exploration in the US and signalled a partial or total retreat from its onshore operations in Nigeria.
Van Beurden, who took over from Peter Voser at the turn of the year confirmed that fourth-quarter profits – on a current cost of supply basis – had plunged by 71% to $2.1bn. Annual earnings almost halved to $16.7bn. Van Beurden's plans, including a multibillion-pound programme of disposals and writedowns, were announced in the wake of a tumultuous fourth quarter that saw earnings plunge 71% to $2.1bn (£1.3bn) while oil and gas production fell 5%.
The company will increase the pace of overall asset sales, which are expected to be $15bn over the next financial year – both in the exploration and refining sides of the business. "We are making hard choices in our worldwide portfolio to improve Shell's capital efficiency", Van Beurden said. "We have not always made the right capital choices," van Beurden said at a briefing in London as he revealed a $687m writeoff in North America from shale, gas and the damaged Arctic drilling rig Kulluk.
"Our ambitious growth drive in recent years has yielded a step-change in Shell's portfolio and options, with more growth to come, but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas," he added. He blamed poor markets as well as internal failures for its problems as he dramatically pulled the plug on Shell's controversial scheduled drilling programme in the Alaskan Arctic this summer. Van Beurden admitted the exploration drive in the Chukchi and Beaufort seas, which has cost $5bn so far, was "under review" amid a torrent of negative campaigning from green groups.
The decision to shelve drilling off Alaska this summer will delight environmentalists and is the latest setback for the Anglo Dutch oil giant in the far north. A swath of onshore shale oil and gas assets in North America, with a balance-sheet value of $24bn, are also being considered for disposal or writedowns, while $1bn has been knocked off US shale drilling planned for this year. "You could argue we went in too far, too quickly [into shale]," he said.
It follows a US court ruling that the department of the interior had failed to consider all environmental impacts of the exploration in the Chukchi and Beaufort seas when it gave Shell permission to drill. Van Beurden also made clear that Nigeria, once a key part of the Shell empire but a country where onshore operations have been subjected to repeated physical attacks, was being prepared for a future selloff or major scaling-back. "We have seen a very difficult security situation for a number of years … What really do we have as value-added in this?" he asked.
"This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014," Van Beurden said. "We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible." Van Beurden, who took over from Peter Voser at the start of 2014, confirmed that annual profits, on a current cost of supply basis, had slumped 48% to $16.7bn despite very high oil prices, although US gas prices have been low.He is expected to give more details of his strategy after a management day on 13 March. "We are making hard choices in our worldwide portfolio to improve Shell's capital efficiency," Van Beurden said.
Greenpeace Arctic oil campaigner Charlie Kronick said: "The company has spent huge amounts of time and money on a project that has delivered nothing apart from bad publicity and a reputation for incompetence. The only wise decision at this point is for Mr. Van Beurden to cut his company's losses and scrap any future plans to drill in the remote Arctic ocean. "Our ambitious growth drive in recent years has yielded a step-change in Shell's portfolio and options, with more growth to come, but at the same time we have lost some momentum in operational delivery, and we can sharpen up in a number of areas," he added. Shares in Shell closed up 1% at £21.48.
"Shell's Arctic failure is being watched closely by other oil companies, who must now conclude that this region is too remote, too hostile and too iconic to be worth exploring." Shell still has drilling interests in a range of territories, including the US Gulf, Brazil, Norway, Russia and Mozambique.
Van Beurden will be under pressure to give a wider explanation of the company's plans and problems when he faces investors and media later on Thursday. Group spending is to be slashed this year by 20% to $37bn and the moves to halt high-cost operations off Alaska were particularly welcomed by environmentalists.
Meanwhile Shell said it had distributed more than $11bn to shareholders in dividends and repurchased $5bn of shares in 2013. Greenpeace campaigner Charlie Kronick said: "The company has spent huge amounts of time and money on a project that has delivered nothing apart from bad publicity and a reputation for incompetence. The only wise decision at this point is for Mr Van Beurden to cut his company's losses and scrap any future plans to drill in the remote Arctic Ocean."
Reflecting confidence in the potential for free cash-flow growth in 2014, the company said it was expecting the first quarter of 2014 dividend to be $0.47 a share, an increase of over 4% compared with the same period of 2013, and total dividends announced in respect of 2014 to be potentially more than $11bn. Jacqueline Savitz, a vice-president at the Oceana conservation group, which had taken legal action to try to stop the oil company drilling, said: "Shell is finally recognising what we've been saying all along: that offshore drilling in the Arctic is risky, costly and simply not a good bet from a business perspective."
The basic financial results were known two weeks ago when the company issued a shock profit warning. The decision to shelve drilling off Alaska came alongside a $200m writeoff of expenses connected with the Kulluk drilling rig, which ran aground in 2012.
At the time the Anglo Dutch group blamed a whole host of issues, including higher exploration costs, security problems in Nigeria, a high dollar exchange rate as well as heavier than anticipated maintenance work on liquefied natural gas (LNG) plants. It also follows a US court ruling that the US department of the interior had failed to consider all environmental impacts of exploration in the Chukchi and Beaufort seas when it gave Shell permission to drill.
City analysts did not to react strongly to the bad news believing it was largely part of a traditional "kitchen sinking" of all the bad news by an incoming chief executive. "This is a disappointing outcome, but the lack of a clear path forward means that I am not prepared to commit further resources for drilling in Alaska in 2014," van Beurden said. "We will look to relevant agencies and the court to resolve their open legal issues as quickly as possible," he added, indicating there could be huge writedowns emanating from the Arctic still to come.
But Nick Butler, a former energy adviser to No 10 and now a columnist with the FT, said this explanation was unlikely and yet he questioned what had changed so quickly since a benign third-quarter presentation on 31 October. Meanwhile Shell said it had distributed more than $11bn to shareholders in dividends and expects to spend more in 2014. The basic financial results were known two weeks ago when the company issued a shock profit warning, but on Thursday Van Beurden brushed off suggestions that management must have seen the crisis coming and should have told the market quicker.
"Anything less (than a full and detailed explanation today) will reinforce the impression that there is a governance problem which has left top management and directors out of touch with the operations of the business," he wrote earlier this week. Total backs shale
Shell is traditionally seen as an extremely cautious company, although it had its own brush with scandal almost exactly 10 years ago when the company was accused of fiddling its reserve figures. The French oil group Total has taken a second bet on Britain becoming a significant shale gas producer.
The company has already said it will make up to $15bn of divestments in an effort to concentrate on higher value assets. On Wednesday it announced its latest sale of a stake in a Brazilian field to Qatar for $1bn. Shell has also recently sold off $1bn interests in the Wheatstone LNG scheme in Australia, is reviewing some of its US shale gas holdings, and there is speculation that it is losing heart with its huge but trouble-hit Nigeria business. Small independent shale pioneer Egdon Resources said it had sold off another part of its licence in the Gainsborough concession in the Midlands. Total will also pay £13.5m of exploration costs.
Earlier this month, the company took a 40% interest in two shale exploration licences in Lincolnshire.
The move came on the day Shell reiterated that it had no current interest in UK shale. Shell is pursuing shale exploration in the US, Ukraine, China and Russia. But its financial turbulence means this year Shell will reduce its global spend on a search for shale resources from $6bn to $5bn.