(Bloomberg)
Royal Dutch Shell Plc said it depleted its oil and gas reserves much faster than it replenished them with new resources in 2015, its worst performance since an accounting scandal that engulfed the company 12 years ago.
Shell said its reserves replacement ratio — the proportion of oil and gas production during the year that was offset by the addition of new resources — was minus 20 percent. The company not only failed to replace any of the 1.1 billion barrels equivalent it pumped in 2015, but also wrote off another 200 million barrels to account for the plunge in oil prices.
Oil and gas reserves are crucial for valuing companies because they form the basis for future output. While producers aim to replace at least 100 percent of the reserves they pump each year, a sudden drop in oil prices can mean some resources held on their books are no longer economic to produce. Shell’s last negative replacement ratio was in 1999 — a figure that was only revealed in 2004 when the company slashed total reserves by 20 percent after admitting it had overstated them for several years.
“It is not normal, obviously,” Chief Financial Officer Simon Henry told reporters on a conference call after the company’s fourth-quarter results.
Project Cancellation
Shell blamed the drop last year on low crude prices and the cancellation of its 80,000 barrel-a-day Carmon Creek oil sands project in Canada. “We significantly curtailed spending by reducing the number of new investment decisions and designing lower-cost development solutions,” Chief Executive Officer Ben Van Beurden said in a statement.
Other major oil companies fared much better in the same price environment. BP Plc reported Feb. 2 a reserve replacement ratio of 61 percent for 2015, while Chevron Corp. achieved 107 percent. Shell’s ratio was “weak,” said Oswald Clint, an analyst at Sanford C. Bernstein & Co.
Shell said that its total oil and gas reserves at the end of 2015 stood at 11.7 billion barrels equivalent of oil, down 1.4 billion barrels from the previous year. The company reported a 44 percent drop in fourth-quarter profit and is betting its $50 billion acquisition of BG Group Plc, set to close on Feb. 15, will help it maintain dividends and increase oil and gas production at a time when cash flow is shrinking.
Shell admitted more than a decade ago that it had been overestimating the size of its oil and gas resources by almost a quarter, particularly in Nigeria. The company restated reserves for the period from 1997 to 2002, and made further changes in 2003 and 2004. The ensuing scandal led to fines in the U.S. and U.K., hundred of millions of dollars of payments to settle investor lawsuits, the ouster of the company’s chairman, and the consolidation of the Dutch and British branches of the corporation.
The scandal led to closer scrutiny of how oil companies book their oil and gas reserves by auditors, regulators and investors.
Profit Drop
Profit adjusted for one-time items and inventory changes shrank 44 percent to $1.8 billion, near the midpoint of the preliminary $1.6 billion-to-$1.9 billion range it gave last month, Shell said Thursday.
The slump in crude has hit earnings of companies around the world. Statoil ASA, Norway’s biggest oil company, said on Thursday fourth-quarter adjusted profit fell 63 percent and missed analysts’ estimates. BP’s dropped 91 percent and Exxon’s 58 percent. Chevron Corp. reported its first loss since 2002.
The acquisition of BG is due to become effective Feb. 15. Its completion “marks the start of a new chapter in Shell, rejuvenating the company and improving shareholder returns,” Chief Executive Officer Ben Van Beurden said in a statement. “Shell will take further impactful decisions to manage through the oil-price downturn, should conditions warrant that.”
Asset Sales
The company plans to sell $30 billion of assets after the acquisition is complete. As oil prices remain low, that may be difficult because the slump has squeezed the balance sheets of potential buyers. Most of this year’s disposals are likely to be in the second half of the year, Van Beurden said on a conference call on Thursday. The company divested $5.5 billion of assets in 2015.
Shell’s return on average capital employed dropped to 1.9 percent at the end of last year compared with 7.1 percent in 2014, according to the statement. That’s the narrowest margin since the late 1990s and is likely to increase as new projects, including liquefied natural gas in Australia, come on line, Chief Financial Officer Simon Henry said.
The company’s cash expenditure, including the dividend payout, surpassed its earnings from operations and asset sales by $2 billion last year, Henry said. That put Shell’s break-even point at “just under $60” a barrel, he said. BP reiterated this week it would be able to balance its books if oil returns to that level in 2017.
Cutting Costs
To ride out the downturn, Shell reduced operating costs by $4 billion, or about 10 percent, last year, and plans to cut them by a further $3 billion in 2016. It expects $33 billion of capital spending this year following the combination with BG, lower than a previous estimate of $35 billion.
Shell, which exited a gas field in Abu Dhabi and stopped an oil-sands project in Canada last year, is postponing final investment decisions on LNG Canada and Bonga South West in deep water Nigeria because of lower energy prices, Van Beurden said. LNG Canada is a venture between Shell, PetroChina Co., Korea Gas Corp. and Mitsubishi Corp. The LNG export facility, planned to be built in Kitimat, British Columbia, won government approval to start construction last month.
