Shell Caps Spending, Seeks More Cuts

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--Europe's largest oil company, Royal Dutch Shell plc (NYSE:RDS-A) (The Hague, Netherlands) is capping spending for the rest of the decade as it attempts to protect itself against volatile oil prices.

Shell said that capital expenditures will be in the range of $25 billion to $30 billion each year to 2020. Investments for 2016 are expected to be $29 billion, excluding the purchase price of liquefied natural gas (LNG) specialist BG Group Plc (LSE:BG) (Reading, England). Shell got the green light for its proposed $70 billion takeover from shareholders in both companies in February. For additional information, see February 1, 2016, article--Shell Gets Green Light for $70 Billion Takeover of BG.

Shell Chief Executive Ben van Beurden said that capital spending will be reduced further to the bottom of range if oil prices drop but that even if oil prices rise Shell will not exceed its top end spending range.

"I see important opportunities for Shell from the substantial and lasting changes underway in the energy sector. We expect to see robust demand for oil and gas for decades to come, in a global energy system in a long-term transition to lower carbon fuels. As well as low oil prices today, we are seeing higher levels of price volatility, due to geopolitical change, the speed of information flows and the pace of innovation in our sector. By capping our capital spending in the period to 2020, investing in compelling projects, driving down costs and selling non-core positions, we can reshape Shell into a more focussed and more resilient company, with better returns and growing free cash flow per share."

The company expects to sell up $30 billion of assets, including up to 10% of its oil and gas production, for 2016-18 period. It expects to save $4.5 billion in cost savings from its takeover of BG, up from its previous estimate of $3.5 billion. It announced another planned 2,200 job cuts last month, on top of 7,500 jobs shed in 2015. Voluntary redundancies of 5,000 are being sought at BG.

The company said that Brazil and the Gulf of Mexico "represent the best real estate in global deep water" and predicted that its deep-water production could double to some 900,000 barrels of oil equivalent per day (boe/d) in 2020, compared with 450 boe/d in 2015.

In the chemical sector, Industrial Info reported that the company has just made a final investment decision to build an ethylene unit with a polyethylene derivatives unit, near Pittsburgh, Pennsylvania. Using ethane from shale gas producers in the Marcellus and Utica basins, the complex will produce 1.6 million tons of polyethylene per year. For additional information, see June 9, 2016, article - The Tale of Shell and Sasol: The Ups and Downs of the U.S. Ethylene Wave.

Van Beurden concluded: "Our strategy should lead to a simpler company, with fundamentally advantaged positions, and fundamentally lower capital intensity. Today, we are setting out a transformation of Shell."

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