Shell's new boss, Ben van Beurden, said bets on U.S. shale plays haven't worked out for his company. Its North American performance was already hit by pessimism over offshore Alaska, but its latest move shows Big Oil hasn't quite mastered how best to capitalize on the U.S. oil boom.
"Some of our exploration bets have simply not worked out," Shell’s Chief Executive Officer Ben van Beurden said.
Van Beurden said it was bad management policy to commit close to $80 billion in capital on its North American portfolio and still lose money. Now, he said, it's time to cut the loss and slash exploration and production investments by 20 percent for 2014.
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Shell's new boss made big waves earlier this year when he said he wasn't ready to commit any more capital to drilling in the arctic waters off the coast of Alaska. Now, the company said its profitability has been impacted by losses in U.S. shale basins in the Lower 48.
In January, he warned things weren't going as he expected. Fourth quarter upstream earnings, he said, were hit by high exploration costs and lower production volumes. Its upstream business in the Americas, Shell warned, was expected to incur a substantial loss this year.
His disappointment comes as the U.S. Energy Information Administration said strong growth was expected from the Bakken, Eagle Ford and Permian basins in the country. By the end of this year, EIA said crude oil production should reach 8.4 million bpd and hit 9.2 million bpd in 2015 thanks in part to shale.
Shell, however, said it may have to unload its stake in the Eagle Ford shale play in Texas to keep its corporate checkbook balanced.
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The tendency would be to blame Shell for its poor management team. While Marvin Odum, the boss of Shell's U.S. division, wasn't discussing how the cut backs would hurt business at his Houston office, he still has a job, however.
Onshore North America is different from offshore North America. Offshore, there are no private landowners to negotiate with, though from an engineering standpoint, onshore is much easier. BP last week acknowledged the challenge and decided to spin off its onshore business to better focus on the "unique characteristics" of U.S. shale.
Shell, by its own admission, said it hasn't quite figured out the do's and don'ts of the shale boom. While credited with exponential growth in U.S. oil and natural gas production, Shell's problems say more about the difficulties of shale exploration than they do about the company itself. The shale boom, for all its glory, has yet to spread much outside North American borders. BP said its new spin off "will be designed to adapt" to onshore problems, where shale still proves to be a tough thing to crack.
By Daniel J. Graeber of Oilprice.com