Recently, Exxon Mobil, Royal Dutch Shell, and Chevron reported disappointing results for the fourth quarter and year of 2013. The main reason for all of their declines was lower production since oil prices remained high. More disappointing than none of these huge corporations could forecast growth in production despite vast investments especially in the North American and Russian Arctic’s, the Gulf of Mexico, and several other areas.
Shell’s performance was particularly disappointing and in the author’s opinion it reflects a mixture of management decisions which are in conflict as if the engineers and technical specialists of the company do not seem to agree with their own economists and/or accountants, which leads to huge losses in particular projects, huge underestimates of investment requirements and frequent announcement of changes in decisions for particularly import projects.
The most disappointing change to the author is the new decision of Shell not to go ahead with plans to build a major facility in Louisiana that would turn natural gas into synthetic diesel as reported in my study “Expressway to US Energy- Independence GTL Diesel” of June 2012, consumption of the middle distillates in the USA is about 4 million barrels per day (b/d) out of a consumption of oil and liquids of 19 million b/d. The use of the abandon of low cost shale gas in the USA for GTL diesel would not only be profitable but it would cut US oil imports by about 50% and save about $146 billion in foreign exchange for the USA per year.
Shell has built a GTL plant in Qatar called PEARL for about $19 billion and capacity of 140,000 barrels of products per day including: Diesel based oil to lubricate vehicle engines, gear boxes, and transmissions; GTL base oil for lubricating vehicle engines; blending with conventional diesel for cleaner burning and lower emission; GTL Kerosene for cooking, lighting, and dry-cleaning and potentially as jet fuel; GTL normal paraffin and GTL naphtha for plastics and several other products.
Shell’s Pearl GTL began operations in mid 2011 and was expected to reach full production by mid 2012. Without attributing any cost for the gas in input, a high official of Shell claimed that the Pearl GTL plant would be profitable as long as oil prices remain above $40/b. Another high official later claimed the same as long as
oil prices remained above $70/b. Who can now claim such low oil-prices? Similarly expected it’s Qatar GTL to generate $4.5 billion of annual cash flow when fully up and running at $70/ b/d oil price assumptions.
In its 2013 report Shell reported that “Pearl GTL in Qatar, contributed some 170 thousand BOE/D to production in 2013” (2). In other words, the plant has already exceeded its proclaimed capacity by 21.4% with consequent lower capital costs. At an oil price of $70/b diesel would sell between $1.67-$2.00 a gallon. In fact, now the price of diesel in USA is almost $4.00 per gallon or a difference of at least 100%. Therefore, the annual cash flow of the Pearl GTL plant should be double the 4.5 billion dollars mentioned before as estimated by Shell, $9/$10B per year. A very profitable investment indeed! The author estimates total cost of $50 per barrel of diesel even if Shell pays $5 per 1,0000 cubic feet of gas. Therefore, profit of the plant is at least one-third of the cash flow or $3 billion per year. Therefore, Shell’s decision to cancel construction of a similar plant in the USA remains a mystery and in the author’s opinion, shareholders and the public deserve an explanation for such a consequential decision for the American economy.
Shell is certainly innovative and daring. The above example of the Pearl plant shows its ability for innovation. It’s daring is perhaps best illustrated by spending as much as $5 billion in Alaska’s Beaufort and Chujhic Seas off the state’s North Slope before abandoning such a gigantic effort because of extremely frozen weather and no drilling at all.
The latest upset in Shell’s decision making is the announcement that it had renewed an option to buy site of a proposed $2 billion ethylene in western Pennsylvania. The proposed plant would turn ethane liquid produced along natural gas and oil into ethylene, used to make plastics (3).
In this connection note that the price of Marcellus shale gas is often quoted at about half the price of Henry Hub except for the recent weeks when extraordinary and record-breaking cold weather briefly gave an uplift to the shale gas price of Pennsylvania.
Despite all the above, Shell remains one of the biggest and most important oil and gas companies in the world with assets of $360.3 billion at end of 2012 and earnings of $16.7 billion in 2013 as compared to $27.2 billion in 2012, a drop of 38.6%. The drop in earnings in the fourth Quarter of 2013 was $5.2 billion from $7.4 billion in the same Quarter in 2012, an amazing drop of 297.3%! Thus the rate-of-return dropped from 13.6% in 2012 to only 7.9% in 2013.
(1) Charles Cosntantinou “Expressway to Energy Independence” June 2012
(2) Yahoo Finance “Royal Dutch Shell PLC. 4th Quarter and Full Year 2013 Unaudited Results” January 30th, 2013 page 5 Wall Street Journal “Shell Puts off
(3) Drilling in Alaska’s Arctic” by Tom Fowler and Ben Lefebure” February 28th 2013 page B7. (3) Wall Street Journal “Shell is Ruining Option for Factor Site” By James R. Hagerty, December 27th, 2013, page B5.
Authored by Charles Constantinou
http://www.shaleintelligence.com
Twitter: @shaleintel
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