Shell Absorbs BG Ahead of Plan

Anglo-Dutch major Shell has absorbed BG ahead of time, with more savings still to come, the company's CFO Simon Henry said at a Q3 2016 press conference November 1. But low oil prices, low refining margins and low gas and LNG prices all posed challenges to the company, and Henry said the company is working towards profitability at $50/barrel, its price assumption for next year, and to be "robust" if oil goes above. His comments suggested that the Opec meeting this month would not make a difference.

Announcing a profit of $1.375bn on a current cost of supplies basis, compared with a Q3 2015 loss of $6.12bn, he said the integration of BG is complete and well ahead of plan." It was acting as a catalyst to the company's cost structure, its working practices and its portfolio, and was proving profitable, although at this stage, more than half a year after the deal completed, it was becoming hard to distinguish between BG and Shell.

Shell is spending less now than it had done before the acquisition, and is cutting capital expenditure for next year by $4bn, mostly from upstream as projects such as Gorgon LNG in Australia and Kashagan in Kazakhstan start up.

Part of Shell's valuation of BG derived from production of 600,000 barrels of oil equivalent/day and now BG's assets on some days are producing over 900,000 b/d, he said. "It is bringing value to the bottom line," he said – several hundred million dollars over the quarter.

Among the assets that the purchase of BG brought was the first – and the cheapest – of the 20-year LNG capacity contracts with Cheniere, for Sabine Pass in the US Gulf coast.

Shell's pioneering Prelude FLNG vessel

(Credit: Shell)

Whereas earlier this year, when the first train started up, the LNG was confined to the Atlantic by arbitrage opportunities, that situation is now different, the head of Integrated Gas, Maarten Wetselaar said. In "recent weeks" the spreads have begun to shift a bit. With the US Henry Hub price below $3/mn Btu, European gas at $6/mn Btu and spot LNG around $7/mn Btu, combined with low shipping rates, cargoes are moving into the Pacific. "So far we are in the money, but the margins are much lower than expected when the deal was signed," he said. 

Other former BG assets are in the UK North Sea, a province that remains profitable as costs have been cut back by as much as half, in some cases, Henry said. Shell has been trying to sell a package there for some time but nobody so far has valued them more highly than Shell itself. Reliability has been high at 80% and, with the exception of the two BP-operated UK West of Shetland projects (Clair Ridge and Schiehallion-Quad204) that are due to start up and which Shell is involved, the province is cash-generative, he said. He poured water on analysts' comments that the Permian basin assets could be on the block, saying they were too important to Shell's strategy. Chevron in its 3Q results on October 28 outlined how its separate Permian basin assets are crucial to its own 2020 production targets.

Shel's Integrated Gas earnings included a net charge of $317mn, primarily reflecting some $420mn related to provisions for certain onerous tolling contracts in Europe and the US. Wetselaar said the European element included the remaining four years' of a 20-year contract signed as part of its plans to enter the Spanish power market, which never developed as Shell had hoped.

William Powell