Shell CEO Ben van Beurden said Thursday the recent sharp fall in global oil prices demonstrated the need for oil companies to practice cost discipline, as the Anglo-Dutch major bucked the third-quarter industry trend of falling profits.
In an earnings statement, Shell said its Q3 oil and gas production fell 5% year on year to 2.79 million b/d of oil equivalent, but an improved refining performance helped push core profits up by 31% to $5.8 billion.
Shell's peers in Europe -- BP, BG Group, Total and Statoil -- all reported falling profits due to the lower oil price in the third quarter, with the Norwegian state-controlled major even slipping into the red.
"The recent decline in oil prices is part of the volatility in our industry," van Beurden said in the statement.
"It underlines the importance of our drive to get a tighter grip on performance management, keep a tight hold on costs and spending, and improve the balance between growth and returns," he said.
'RESILIENT' AT $70/B
On a conference call with reporters later Thursday, CFO Simon Henry said the recent oil price drop was part of the volatility in the industry.
"We plan our strategy around the expectation of such volatility. We invest and plan our strategy at a wide range of prices," Henry said.
He said $70/b was at the bottom of the range "where we need to be resilient and robust."
Shell's strategy is to look to maximize exposure when prices are at the higher end of the range, at $110/b, while the goal is to be "competitive" at $90/b, Henry said.
"We try not to overreact to short-term movements," he said.
Henry did concede, though, that with prices staying low in the fourth quarter, Shell's revenues would be "squeezed" going forward.
He said that a $10/b price fall would be reflected in a $3 billion hit to earnings, so a $25/b fall would represent $8 billion in downside.
Asked whether Shell had flexibility to adjust its capital expenditure based on a lower oil price, Henry said: "We don't invest on today's oil price."
But, he said, there was some flexibility for exploration projects, smaller developments, and its unconventional oil and gas assets.
Here, "we will take a closer look at those projects if the price weakness persists."
Henry said Shell expected to hold off on further development of part of its North American unconventional liquids-rich portfolio -- assets in the Permian Basin in the US and the Montney and Duvernay plays in western Canada -- given the recent fall in oil prices.
PRODUCTION EXPECTED TO FALL
Shell said its production decline was due to the impact of divestments, the expiry at the start of the year of the Abu Dhabi license, PSC price effects and security impacts in Nigeria.
Looking forward, output is expected to fall further, Henry said.
"In the short-to-medium term, production is likely to decline, and grow after that from a lower base," he said.
This is due mainly to the impact of divestments, which will have an impact of some 120,000 b/d in 2015.
Shell will also lose production from Nigeria in the range of 80-100,000 b/d once it finalizes the sale of four onshore blocks.
But, Henry said, growth would return with the ramp-up of new projects, especially in the deepwater Gulf of Mexico.
He said production from the Gulf of Mexico was now averaging around 220-230,000 b/d, and that it could top 300,000 b/d in the future.
In the downstream, Shell's Q3 earnings benefited from higher refining margins, reflecting the industry environment and improved operating performance, the company said.
Earnings also benefited from lower operating expenses, mainly resulting from divestments, as well as increased trading contributions, it said.
Excluding portfolio impacts, refinery intake volumes were in line with the same period a year ago at some 2.9 million b/d.
Refinery availability was 94%, compared with 93% for Q3 2013.
Henry said, though, that Shell wouldn't be building a strategy around higher refining margins.
"There is still huge overcapacity in the industry -- over 10% -- which continues to grow as new refineries come on stream," Henry said.
"Margins stayed strong in North America, improved in Europe, but remain very weak in Asia where the new capacity is coming on. We cannot cannot build a strategy around that environment," Henry said.
Shell also announced Thursday that former DuPont CEO Charles Holliday would replace Jorma Ollila as Shell chairman in 2015.
