Published on March 15, 2014
Royal Dutch Shell recently announced a 71 per cent decline in profits and failed to accomplish production growth and shareholders return targets. Shell has made its presence known in almost 100 countries, produces 3.2 million barrels of oil per day and is one of the biggest energy companies.
Shell paved the way for world’s first oil tanker. The company even discovered oil and gas fields of Nigeria, Brunei, Indonesia, Oman, Malaysia and New Zealand.
But, the oil giant has been slammed by human rights activists and anti-oil pollution NGO’s for its role in Nigeria’s Niger Delta. Shell’s decision to sink its offshore oil platform Brent Spar, oil spills in Argentina and a reserves scandal have come under a lot of criticism, which also led to the ouster of former chairman Sir Philip Wyatt.
Shell has been facing a lot of problems, including cost overruns and low profits in its $46 billion capital spending projects. A number of projects like Wheatstone LNG in Australia, Niger Delta in Nigeria, gas to liquid plants in Louisiana’s Gulf Coast, Bellwether projects in the Kashagan oilfield in Kazakhstan, Sakhalin in Russia, Beaufort Sea in Alaska’s Arctic Ocean and Majnoon oilfields in Iraq have all underperformed as a result of environmental, security, political or execution issues. The failure to make these projects a huge success led to 5 years of share underperformance. Investors lost confidence in management decisions related to capital allocations.
The scale of expenditure makes Shale an important body in the energy sector. In 2013, the company’s capital spending budget was $46 billion and the management spent $8 billion in mergers and acquisitions. According to analysts, Shell’s returns on capital employed (ROCE) has declined from 20 per cent to 9 per cent.
The company had gotten itself involved in too many capital intensive, environmentally contentious projects and even jeopardised the dividend. The new CEO of Shell has decided to limit costs, stop highest drilling in Alaska’s Arctic wilderness, shelve plans to build LNG plants in Australia and Louisiana, USA, restrict capital spending to $35 billion in 2014, divest assets worth $15 billion and increase the dividend by 4 per cent.
Shell’s divestiture strategy might be beneficial for the Arabian Gulf’s state owned oil and gas companies. Shell sold a stake in an offshore Brazil oilfield to the Qatar Petroleum Company (QPC) for $1 billion. The company also sold a stake in its Australian LNG project Wheatstone to an affiliate of Kuwaiti Petroleum Company.
Shell is also planning to sell off marginal oil and gas fields in the North Sea and pipeline networks, refineries and storage businesses in the US Gulf Coast.
Shell’s divestment strategy will also offer acquisition opportunities for UAE’s state-owned global energy investors.
This strategy is likely to have positive environmental impact. Shell’s decision to stop Alaska Arctic drilling and limit onshore drilling in the Niger Delta would help protect two frail ecosystems. This is a victory for the environmental movement as well.
