Shell Cuts 2015 Capex, Sees Downstream Downturn

Shell said Thursday it had reduced its expected 2015 capital expenditure to $33 billion from previous guidance of a little more than $35 billion as the company continues to adjust its business to the lower oil-price environment.

Shell, releasing its first-quarter results, also said it continued to reduce its operating costs and capital spending, with Q1 operating expenditure down by $1.1 billion year on year.

Speaking to reporters on a conference call, CFO Simon Henry said the capex this year would be $33 billion, or "potentially less," a reduction of at least $2 billion compared with guidance given by Shell three months ago.

Then, CEO Ben van Beurden said capex would be flat or slightly less than the $35.3 billion spent in 2014.

Henry said that it had highlighted a number of projects where Shell could reduce its financial exposure, including the Majnoon project in Iraq and Carmon Creek in Canada.

"We have pushed out the Majnoon decision into 2017 or later," Henry said, referring to a plan to implement full field development at the southern Iraqi project.

Shell has been in discussions with the Iraqi government over the full-field development plan for Majnoon for some time as they look to agree on what the future plateau target for the field would be.

Iraq said late last year it had provisionally agreed with Shell to reduce the plateau production target for Majnoon to 1 million b/d from 1.8 million b/d.

But with Henry's comment Thursday any further development of the field does not seem imminent.

Majnoon, which currently produces around 210,000 b/d, is one of the last major southern oil fields yet to agree a revised production target.

Henry also said Shell was looking to rephase the Carmon Creek thermal in situ project in Canada and cut spending on unconventional projects in North America.

"We are looking to optimize design [at Carmon Creek] to bring costs down," Henry said.

Price outlook

Shell said it was deferring and reshaping new projects in a bid to achieve further efficiencies and savings in the global supply chain given the lower oil price.

Henry said there would likely be continued price volatility in the short term, saying: "Prices could go up, they could go down."

But, he said, Shell was confident that oil market fundamentals would reset in time and that the marginal cost of production would not fall to $50/b or below.

Shell has also been offloading assets in recent years, but Henry said it was becoming "more difficult to divest" and that any further selloffs in 2015 in the upstream would not be "that material."

Downstream asset sales are likely to continue through 2015, however, he said.

Shell's production dipped by 2% in Q1, and the company also said it expected second-quarter maintenance at operations at its Pearl gas-to-liquids plant in Qatar, in the deepwater Gulf of Mexico and heavy oil in Canada to cost the company some 140,000 b/d of oil equivalent compared with the same period last year.

One of the two trains at the 140,000 b/d capacity Pearl GTL facility was shut down in late February for maintenance and only restarted in early April.

Shell said it also expects to lose 160,000 boe/d due to divestments and a further 100,000 boe/d on limits to gas reinjection in the Netherlands in the April-June period.

In Q1, total oil and gas production was 3.17 million boe/d compared with 3.25 million boe/d a year ago, Shell said.

Liquids production increased by 4%, but gas output dropped by 8% compared with the first quarter of 2014.

Shell said new startups and project rampups contributed around 137,000 boe/d. These included Bonga NW in Nigeria, Gumusut Kakap in Malaysia, and Mars B and Cardamom in the Gulf of Mexico.

Equity sales of LNG of 6.17 million mt were 1% higher than in the same quarter a year ago, reflecting better operational performance, partly offset by the impact of the divestment of its stake in Australia's Woodside.

Shell is set to become much bigger in LNG after it completes the acquisition of the UK's BG Group, announced earlier this month.

Downstream downturn?

Like its peers BP and Total, Shell enjoyed a good downstream performance in the first quarter.

This, Henry said, was due in part to some short-term external factors such as upsets at refineries in North America and maintenance work in Europe.

But, he said, the improved margins may not last.

"They are probably already running down in April," Henry said.

He added that overacpacity was still an issue, not least with new plant coming on stream in the Middle East targeting export markets in Europe and the Asia-Pacific region.

"We are already seeing lower margins," he said.

Shell also said that as a result of asset sales in Australia and Italy, refining capacity is expected to reduce by 120,000 b/d in the second quarter compared with the same period of 2014.

It added that refinery availability was expected to decline in the second quarter 2015 as a result of increased planned maintenance compared to the same period a year ago.