Royal Dutch Shell announced this week that it was selling its Appalachia shale gas assets for $541 million in a transaction that wouldn’t have caught much attention if it weren’t for the fact that the oil and gas supermajor had paid nearly nine times that price when it bought the assets a decade ago. Shell’s decision to divest its Appalachia shale gas assets is a move indicative of two major trends among international majors. One is the focus on core operations and ditching underperforming assets in recent years. The other is a more recent rush of oil majors trying to dump their assets in the Marcellus and Utica shale plays amid persistently low natural gas prices which have forced supermajors—including Shell and U.S. Chevron—to write down billions of US dollars of valuations on their assets in Appalachia.
In this week’s announcement, Shell said it was selling its assets in the region to U.S. energy company National Fuel Gas Company (NFG), in a deal expected to close by the end of July 2020.
“The transaction is part of divesting non-core assets and in line with Shell’s Shales strategy which focusses on development of higher margin, light tight oil assets,” Shell said, noting that it is bailing only on the upstream assets in the region and remains committed to Pennsylvania with its Pennsylvania Petrochemicals Complex.
With the sale, Shell will be transferring ownership of around 350 producing Marcellus and Utica wells in Tioga County and associated facilities, with current net production at around 250 million standard cubic feet per day.
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This deal would have been a transaction like many others, were it not for the fact that Shell paid $4.7 billion to enter the Appalachian basin in 2010, at the start of the shale gas boom in the United States.
The sale, at a price nearly nine times lower than what Shell forked out a decade ago, shows that the supermajor doesn’t consider its Appalachian assets worth holding onto at times when every project and asset in an oil company’s portfolio is competing for top performance that would not relegate it to the ‘non-core assets’ list earmarked for divestment.
The low natural gas prices over the past few years have played a major role in oil majors seeing the Appalachian basin as no longer worth their attention and investments.
Low natural gas prices already forced billion-dollar impairments related to U.S. shale gas assets in the supermajors’ balance sheets at the end of last year.
Shell, for example, reported $1.93 billion related to impairments in 2019, primarily in unconventional gas assets in the US and a drilling rig joint venture.
Another supermajor, U.S. Chevron, reported for Q4 2019 impairments and write-offs totaling $10.4 billion. More than half of this was related to the Appalachia shale, Chevron said a few months earlier, when it warned the market of the huge impairment charges.
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Chevron said in December that it would reduce funding to various gas-related opportunities including Appalachia shale, and that it was evaluating its strategic alternatives for these assets, including divestment.
Chevron’s assets in the U.S. Northeast “simply don’t compete as well for our investment dollar as others do,” CEO Michael Wirth told CNBC in December, commenting on the write-downs. Chevron is high-grading its portfolio and some of its assets “may work better for others,” Wirth said.
As Chevron is still working on the sale process for its Appalachian assets, it is laying off employees at its Chevron Appalachia unit, Pittsburgh Business Times reported on Tuesday.
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“In light of current market uncertainties, we will continue to monitor conditions in the upcoming months to determine an appropriate time to move forward with solicitation and evaluation of bids,” Veronica Flores-Paniagua, spokeswoman for Chevron, told the Business Times, noting that such a process could take months and might not necessarily result in a deal.
Chevron’s intention to sell its Appalachia assets and Shell’s sale at a $4-billion loss compared to the purchase price show that supermajors are dumping underperforming assets in a market and commodity environment that has forced them to tighten their belts yet again.
By Tsvetana Paraskova for Oilprice.com
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