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Shell's American Woes Highlight Difficulty of Cracking Shale

By Daniel J. Graeber | Thu, 13 March 2014 22:28 | 3

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.

Related Article: Glencore Eyes Shell’s Beleaguered Nigeria Assets

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. 

Related Article: Is the U.K. Ready for a Shale Revolution?

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

Leave a comment

  • ngass on March 14 2014 said:
    To OilPrice.com: Very rarely there is a comment and I am sure people try to write comments. Over the past years, I have written a number of comments but none was published. That is very strange. Over the past months I would have liked to comment on a lot of articles but I refrained from it because it is a useless exercise.

    I hope this gets through to you.
  • Lee James on March 15 2014 said:
    RD Shell seems to sing a song that goes against the grain of whatever we think about the shale revolution. We think of tight-rock oil and gas technology as revolutionary. The EIA' latest drill rig efficiency report looks to be further confirmation that the bonanza is sustainable.

    So what's up with Shell? What is the bigger picture in terms of energy company success, in US shale?

    I'm trying to get at the bigger picture by looking at Energy Sector data. You might go to Morningstar's Sector Returns and make two queries. We're looking at Total Return (share price + dividends). First, see what the line up looks like for the top-performing 100 energy (mostly petroleum) companies. Then check the line up for the 100-largest by market cap energy companies. The two lists are not the same.

    The list for the 100 largest companies (top-to-bottom on return) shows the petroleum majors toward the middle of the list -- they have to be in there somewhere, 'cause the list is made up of the largest companies.

    Now look at the list of the top 100 performers, of any size. The Majors are not to be found.

    Are the Majors that poor as energy performers? No, they show good, high consistency performance. The chance of break-out performance from a major is relatively low. Meanwhile, smaller "more nimble" companies come and go on performance, in part from chance alone.

    Next, make a list based on 5-year performance for the top performers. Compare that to a list of that same group for the last one year. You will be amazed at what seems to be a reshuffling of the cards. Low consistency.

    I'm just an average Joe Blow, but what it looks to me like is quite a commentary on the "success" of the US shale industry -- more than it is a commentary on Shell Oil -- just like the article says.

    I'm more of an index investor. I am commenting more out of concern about what the US is pouring investment dollars into. We need to transition away from fossil fuels, generally. Fossil fuels are bringing in decreasing net benefit to society, and decreasing returns to investors. The Energy Sector is currently on the bottom rung among all sectors.

    Am I misguided in saying that we need to take another look at the dollars and cents of what we are doing in energy and the environment?
  • ghickey on March 18 2014 said:
    A couple years ago, as the nat gas prices were relentlessly pushing lower I tried to talk myself into a long term investment in nat gas. My thinking was along the line of the unsustainability of the high NG output. That thinking caused by the rumors of the high depletion rates of each well drilled.
    And now, a cold winter caused prices to soar.
    If there is so much supply, why the soaring prices. Ditto for oil. World tensions aside we have $100 oil.
    The hope for the US economy was this abundance of cheap energy. Now the stock market is nervous, supposedly over: you pick: China debt, Ukraine tension, shadow bank collapse, rising interest rates,
    or weather crimping the consumer.
    Maybe it is the prospect of the dream of a resurgent industrial America collapsing.
    Naw. Couldn't be.
    Back to Dances with the Stars.

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