LONDON (Reuters) - Having turned round its North American shale business, Royal Dutch Shell is putting so-called unconventional energy at the heart of its growth plans, and believes lessons from the revamp can be applied across the company.
Greg Guidry, head of the Anglo-Dutch group's unconventionals business, told Reuters 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," Guidry said in an interview.
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 No.2 shale resource after North America.
That's quite a change in fortunes.
As recently as late last year, Shell Chief Executive Ben van Beurden was considering jettisoning the unconventionals business over concerns it would drag down group profitability after the group's $54 billion acquisition of BG Group in February.
Shell and rivals including Chevron and Exxon Mobil 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 U.S. 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 around $4 billion 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 percent over the past three years, production has grown by 35 percent and capital spending is down by 60 percent to around $2.0-$2.5 billion.
Today, Shell makes a profit from shale oil production in "sweet spots" in the Permian or Duvernay in Canada with crude prices of $40 a barrel, Guidry said. After dipping below $30 in January, Brent crude is currently trading around $48.
"In terms of execution, we are completely competitive and have aspirations to be leading," Guidry said, adding the business could now compete with leading shale producers such as Pioneer Natural Resources and EOG Resources though costs still could be reduced.
Advances in technology meant there was scope to increase oil recovery from shale rock from today's 7-9 percent by another 1-3 percent over the coming years, Guidry added.
"That is billions of barrels. We absolutely can reach that," the 55-year-old American said.
And unlike multi-billion deepwater projects, shale can be turned on "with the drop of a hat," Guidry said.
At around 300,000 barrels per day, shale today represents around 8 percent of Shell's overall production. However, Shell holds shale reserves of around 12 billion barrels, roughly as much as its deepwater resources, Guidry said.
The shale business got its reward earlier this month when Van Beurden identified it as a key growth priority for Shell in the next decade along with renewable energy.
What's more, Shell engineers are now using the experience in the shale business to improve deepwater projects, which helped knock out $1.5 billion 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 Bernstein analyst Oswald Clint, who rates Shell shares "outperform".
But analysts at U.S. investment bank Tudor Pickering, Halt and Co. see growing value in Shell's unconventional portfolio, particularly in the Permian basin, which they value at $13 billion 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.
By Ron Bousso
(Editing by Mark Potter)
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Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production:
Headline crude prices for the week beginning 31 December 2018 – Brent: US$54/b; WTI: US$46/b
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