With Oil resources drying, oil refineries and petro chemical industries have been extravagant in spending on explorations. The success rate of the oil hit varies at times, which leads to a high risk for oil companies in the upstream. Shell (RDS-A) is one such company that has been boosting its expenditure on oil explorations.
The company operates the upstream and downstream business. As we see oil prices plunging, this creates more worries for oil and gas companies as it hits its top and bottom lines negatively. Shell is being seriously hit with this price fall which has compelled the company to make some strategic moves to offset the price fall.
According to the recent fourth quarter earnings report, Shell produced 3.41 million barrels of oil equivalent per day. This is a 3% increase over a year, mainly due to its project Pearl gas to liquid plant in Qatar. The company also recorded a profit of $5.58 billion, which was below expectations.
Exploration Activity
Most of the companies in the oil segment have a healthy budget for oil exploration projects with the main motive of increasing production. Shell, with over 40 ongoing exploration wells projects spread across 18 different countries, sees a prospects of 10 basins for shale oil and gas in China and Ukraine.
The risk is always high in such ventures, as noticed in the past. Shell also failed to complete two exploration well projects in Alaska where the execution is seasonal. In the last six years, Shell has already spent around $5 billion in Alaska with no success to discover any reserves. It paid $2.2 billion in lease rentals with another $2.8 billion in operation costs.
The company anticipates a capital investment of $33 billion which is 10% higher than 2012. The majority of this expenditure is in the high risk zone in order to ramp up production in areas like the Arctic and Kazakhstan.
Shell’s expenses on exploration are rising over the years. It spent $5 billion in 2011, $6 billion in 2012, and around $7 billion in 2013.
Focus on cost cutting
The company recorded a record low quarterly profit in the recently declared results which was the lowest in the past 5 years. It now plans to curtail its expenses on various oil explorations projects.
Journey ahead
Shell has about 30 ongoing construction projects and post commissioning of these projects, it anticipates production to reach around 4 million barrels of oil equivalent per day by 2017-2018. This would certainly place Shell among the top oil producers in the world. The only company that produces 4 billion barrels of oil equivalent per day is U.S Oil giant Exxon and Russia’s OAO Rosneft.
Shell’s growth in 2014 will be partially driven by limiting capital expenses to $37 billion compared to $46 billion in 2013. It also plans to dispose assets worth $15 billion in 2014-15, which accounts for 6.5% of Shell’s current $228 billion market cap. Furthermore, it plans divestment in U.S shale interest, global oil products and onshore Nigeria across its portfolio to show progress in its capital efficiency
Conclusion
Analysts show concern with Shell's expenditure plans. The company, in the past, had some high risk exploration projects which had a negative impact on the bottom line. Although Shell has been curtailing a few projects to reduce its operating expenses, this may cause the company to miss the guideline of achieving 4 billion barrels of oil equivalent per day. So, Shell is not a good investment.
