Shell expects a much more "fulsome" recovery in the second half of 2021, and its upstream oil and gas business to remain "foundational" despite losses and a plunge in reserves last year, chief executive Ben van Beurden said Feb. 4.
Fourth quarter results showed Shell suffered its fifth successive quarter of financial losses in its upstream segment. And it estimated its 2020 reserves replacement ratio would be minus 53%, reflecting lower prices, postponed investment decisions and asset sales.
Its upstream production dropped by 14% from a year earlier to 2.37 million b/d of oil equivalent, under the influence of OPEC+ cuts and hurricanes in the Gulf of Mexico.
However, van Beurden told journalists he was now much more optimistic for the business as a whole, and the expected recovery meant "more room for us therefore to spend," following a $6 billion reduction in capital expenditure last year.
The failure to replace reserves, he suggested, could be seen as a "one-off."
"We look into 2021 with a lot more confidence," he said, adding that upstream oil and gas, including exploration, would remain "a very important, foundational business."
"We have every intention to look after our upstream business so that it will remain a very strong cash generative business, not just for this decade, but well into the next decade," he said.
Van Beurden went on to raise doubts about the Biden administration's decision in the US to block the issuing of leases on federal lands and in federal waters, for the time being. He said Shell itself had plenty of leases in federal waters -- more than 300 lease positions -- but the effect would be to drive up US oil imports, with consequences for emissions.
Shell has "the same goal" as the US administration in terms of supporting the Paris Agreement and achieving net zero emissions by 2050, he said. However, on the question of US drilling, "curtailing the supply of oil and gas is not necessarily the solution for climate change," he said.
"What will happen if we just don't produce these barrels in the Gulf of Mexico -- they will be imported from elsewhere, and guess what, the barrels in the Gulf of Mexico are the most carbon-advantaged barrels that the US currently consumes, so it will not necessarily be an improvement," he said.
In the upstream Shell's adjusted loss in the fourth quarter was smaller than in the third quarter, at $748 million. Adjustments included a $1.3 billion impairment relating to the Appomattox field in the US Gulf of Mexico following a downgrading of productivity expectations there.
Demand recovery
On the prospects for a demand recovery as pandemic lockdowns and travel bans start to lift, van Beurden said aviation remained key.
On demand, "we are at the moment still a ways off from where we were, particularly on oil, we're about 5-7% off from where we were in 2019. That will start to come back more in the course of this year and it will probably be back to where we were in 2022," he said. "Aviation will be a very significant contributor to that remaining recovery that we need to see."
"I am optimistic that in the second half of the year we see a much more fulsome recovery in many parts of our business, we see already in chemicals and already in marketing a significant recovery and I would imagine also in upstream."
In terms of refining, van Beurden said the market collapse last year reinforced long-term trends, noting Shell had cut its refining footprint from 64 refineries at the start of the century to 15 at present and aimed to "high-grade" that to six "energy and chemical parks."
Shell will focus on facilities able to provide a foundation for more innovative fuel types such as biofuels and hydrogen, he said.
"We are repurposing the refineries in places like Singapore and also looking at our refinery configurations in places like Pernis" in the Netherlands, he said. "It will be a high-quality footprint, and importantly we will use that footprint increasingly as a platform to also integrate these facilities of the future."
"We still believe that there is a strong future for these assets in our company, but that will be smaller, that will not be refining for fuels' sake per se."
Q1 outlook
For the current quarter, Shell said its upstream output would be in a range of 2.40 million-2.60 million b/d of oil equivalent, up from fourth quarter levels of 2.37 million boe/d, but well below the Q4 2019 level of 2.76 million boe/d.
Similarly, Shell expects an improvement in refinery utilization in the current quarter, to a range of 73-81%, compared with 72% in the fourth quarter 2020.
Shell's fourth quarter refinery intake was down 20% on the year, and oil product sales were down 26%, at 1.94 million b/d and 4.78 million b/d respectively, although it reported an adjusted profit of $540 million in the segment, with marketing activities contributing $828 million.
Shell's LNG-focused 'integrated gas' division performed relatively well, making an adjusted profit of $1.1 billion, down from $1.99 billion a year earlier, even though liquefaction volumes were down 11% at 8.21 million mt.
It also benefited from higher prices in its chemicals division, reporting a $381 million adjusted profit in the fourth quarter, compared with a $65 million adjusted loss a year earlier, likely reflecting pandemic-related demand.
Shell reported adjusted profit of $393 million in Q4, down 87% on the year, and a return on average capital employed of 2.9%, down from 6.9% a year earlier.
It reduced its net debt by $3.7 billion to $75.39 billion, but its gearing ratio increased to 32.2%, compared with 29.3% a year earlier.
