Scraping the barrel
Calling a halt to its high-cost Carmon Creek oil sands development was probably not a tough decision for Shell. Deciding which projects to cut next will be much harder for Chief Executive Ben van Beurden, especially with crude prices now expected to remain lower for longer.
Although it was unusual for Shell to call time on the Alberta project in the middle of construction, as it did on Oct. 27, the company had already been forced to slow down the design phase. The project was approved two years ago when Brent crude was trading close to $110 a barrel compared with around $47 today. Better to take the $2 billion charges now than push ahead stubbornly with a potentially unprofitable project.
Oil sands developments are among the most expensive in the world to operate, requiring oil prices trading at least above $95 a barrel for the foreseeable future to be profitable, according to some studies. Neither Carmon Creek nor the recently aborted quest to find oil in the Arctic fit into Shell’s forecasts for bankable projects.
Shell’s generous average oil price estimate of around $70 a barrel is above where many analysts expect crude to trade, making the decision of where and what next to cut much more tricky for management to figure out. Expensive projects under construction in deep water areas in the Gulf of Mexico and Malaysia could be at risk.
Behind the race to bring Shell’s project spending in line with lower oil prices is a lingering worry hanging over the entire sector’s ability to safeguard its returns for shareholders. Earlier this month, van Beurden said the company was pulling out all the stops to defend its dividend.
Shell has already committed to reducing capital investment by 20 percent through to next year, and with its $70 billion takeover of BG Group on the horizon the pressure to keep a tight lid on project spending will only intensify, especially if oil prices continue falling. The cuts from here will get harder to find, but if the price environment doesn’t improve, Shell will need to find them nonetheless.