Shell takes unconventional route with shale refocus

Anglo-Dutch major to power up non-traditional energy business just a year after the chief executive considered ditching it.

Oil drums prepared for shipping at the Royal Dutch Shell lubricants blending plant in Torzhok, Russia. The company has reversed its position over unconventionals. Andrey Rudakov/Bloomberg

Having turned round its North American shale business, Royal Dutch Shell is putting so-called unconventional energy at the heart of its long-term growth plans, and believes lessons from the revamp can be applied across the company.

Greg Guidry, the head of the Anglo-Dutch group’s unconventionals business, said a drive to slash costs and streamline decision-making had put his division largely on a par with leading rivals in terms of productivity and efficiency.

And now the rest of Shell could reap the benefits, too.

“The executive committee charged us to be a catalyst for change within the broader Shell,” Mr Guidry said.

He also said Shell planned to make small acquisitions near its existing North American shale areas, notably from producers struggling in the current industry downturn, and hoped to launch an early production well this year in Argentina’s Vaca Muerta, considered the world’s second-biggest shale resource after North America.

That is quite a change in fortunes.

As recently as late last year, the Shell chief executive Ben van Beurden was considering jettisoning the unconventionals business over concerns it would drag down group profitability after the group’s US$54 billion acquisition of BG Group in February.

Shell and rivals including Chevron and ExxonMobil were late to the shale revolution at the end of the last decade and struggled to match the success of smaller independent producers that increased US output by around 4 million barrels per day between 2008 and 2015.

Oil majors’ often cautious pace in complex, high-risk projects was ill-suited to the nimble needs of shale, which requires drilling hundreds of wells and injecting water at high pressure to break the rock that holds oil and gas.

So Shell moved to adapt.

In recent years, it has shed half of its North American unconventional assets for about $4bn to focus on four areas in the United States and Canada.

It has cut its technical check-list for drilling shale wells from 20,000 requirements to less than 200 and given managers “end-to-end” control of the production process from well exploration through to well abandonment, Guidry said.

The division’s efficiency has risen by 50 per cent over the past three years, production has grown by 35 per cent and capital spending is down by 60 per cent to around $2bn to $2.5bn.

Today, Shell makes a profit from shale oil production in “sweet spots” in the Permian, where it has a joint venture with Anadarko, or Duvernay in Canada with crude prices of $40 a barrel, Mr Guidry said. After dipping below $30 in January, Brent crude is currently trading at about $48.

“In terms of execution, we are completely competitive and have aspirations to be leading,” Mr Guidry said, adding the business could now compete with leading shale producers such as Pioneer Natural Resources and EOG Resources, although costs still could be reduced.

Advances in technology meant there was scope to increase oil recovery from shale rock from today’s 7 to 9 per cent by another 1 to 3 per cent over the coming years, Mr Guidry added.

“That is billions of barrels. We absolutely can reach that,” the 55-year-old American said.

And unlike multibillion-dollar deepwater projects, shale can be turned on “with the drop of a hat”, Mr Guidry said.

“We have more resource on our books with half the assets that we did when we got started.”

At about 300,000 barrels per day, shale today represents around 8 per cent of Shell’s overall production. However, the company holds shale reserves of around 12 billion barrels, about as much as its deepwater resources, Mr Guidry said.

The shale business got its reward this month when Mr Van Beurden identified it as a key growth priority for Shell in the next decade along with renewable energy.

What is more, Shell engineers are now using the experience in the shale business to improve deepwater projects, which helped knock out $1.5bn in costs for the development of the Stones field in the Gulf of Mexico.

As oil producers scrap costly and complex projects such as deepwater fields and sharply reduce budgets in the face of the oil price downturn, they are turning again to onshore shale, which offers quicker returns and lower investments.

Some analysts, including at Bernstein, still argue Shell should divest the shale business to focus on core strengths such as deepwater and liquefied natural gas (LNG), which are generating larger profits.

“Surely private equity would have offered some healthy cash proceeds for this business today,” said the Bernstein analyst Oswald Clint.

But analysts at the US investment bank Tudor Pickering, Holt and Co see growing value in Shell’s unconventional portfolio, particularly in the Permian basin, which they value at $13bn if oil hits $75 a barrel.

“We believe Shell’s North American unconventional portfolio is less core relative to global deepwater and LNG but we do see additional value that should command a premium multiple when compared to its European supermajor peers,” they said.

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