Shell’s CEO Ben van Beurden has warned that life is about to get tougher for its portfolio managers, which will ring alarm bells in particular for those running or proposing major projects in its North American deepwater sectors, as the Anglo-Dutch oil major seeks better returns from its assets.

“We have just over $70 billion of capital employed combined in Oil Products and North America resources plays, and the financial performance there is frankly not acceptable,” van Beurden told investors in New York. “There has been an improvement so far in 2014, some of that is the macro, and some is due to our restructuring. But there is a lot more to do here,” he warned.

“Our Upstream Americas resources plays portfolio was built to drive our cash flow growth. But the macro has changed there. We are restructuring both of these portfolios, including asset sales, write downs and cost programs, and we are being much more selective on growth opportunities here,” van Beurden continued.

As part of the plan for tougher in-project evaluation and greater emphasis on portfolio performance, van Beurden will himself be taking a closer look at all FEED aspects for larger developments before they get a Final Investment Decision.

Those larger projects will have to come across his desk before they pass muster: “Shell is opportunity-rich and capital-constrained, and this is driving hard choices in the portfolio,” said van Beurden. “This involves moving ahead with growth projects, such as LNG Canada and Appomattox in the Gulf of Mexico, where we are in front end engineering and design, and at the same time being more selective on new FEEDs, with a routine in place now where I review FEEDs with US $500 million or greater cost implications with my colleagues on the Executive Committee,” he disclosed.

This year Shell will outlay around $35 billion in organic capital spending – 8% lower than last year. “This is part of the drive in Shell to moderate our growth ambitions, and to improve our free cash flow and returns.”

This increased focus on projects does not mean Shell is looking to swing the axe too hard. Already this year it is ramping up its deepwater Mars B development in the GoM; it has also brought onstream the deepwater Bonga North West development off Nigeria, Cardamom in the GoM also just came onstream and offshore Malaysia Gumusut-Kakap is on track to start up before the end of the year.

$4 Bn exploration spend
Van Beurden also outlined details of Shell’s conventional exploration spending this year – amounting to $4 billion – which now has “sharper emphasis” on widely-ranging potential field sizes and development timelines. “Very long-term themes like Arctic and other frontier basins could deliver really substantial new oil and gas fields,” he said.

Regarding recent successes in the US offshore, van Beurden added: “In the eastern Gulf of Mexico, the Rydberg discovery, which we announced in July, is our third find in the Norphlet play, where Shell is the industry leader. Rydberg takes the headline discovered potential in the Appomattox area to around 700 MMbbl. This continues a strong run in Gulf of Mexico exploration for Shell, with over 1 Bbbl of potential resources added in just over 5 years. Just recently, we made a further discovery in the Gulf, in the Mars area, called Kaikias. This one is still being appraised, and should be a new tieback into the Mars or Ursa facilities.”

Van Beurden also pointed out standalone discoveries in deeper water off Malaysia have provided around 400 MMboe (or 2.3 Tcf equivalent) for Shell. Most of this is gas, providing feedstock for existing LNG facilities. Just recently the company also reported a find with its operated Marjoram-1 well in block SK318 in 800 m (2,624 ft) of water 180 km (112 miles) offshore Malaysia, which followed the Rosmari-1 gas discovery earlier this year in the same block. Shell operates the block with 85% and Petronas holds the remaining 15%. (see DI, 27 August 2014, page 5)

“Looking into the next few months, we have important exploration wells drilling in Albania, and appraisal wells on the Libra discovery in the Brazil presalt play. Let’s see how those wells turn out,” van Beurden added.

Hard work ahead
Marvin Odum, director of Shell Upstream America, outlined at the same event how hard the company will work towards better cost performance: “Resource plays remain an important longer term growth opportunity for Shell, with around 10 Bboe of resources and potential in the portfolio. We want to be competitive at the bottom line in this business, and the key to that is accessing the best geology, advantaged evacuation routes, and taking out cost. We’re not there today but we are making good progress,” he said.

After generating $6.3 billion of cash flow in Upstream Americas over the last 12 months – up $1 billion from 2013 – Odum has warned that earnings “are likely to remain volatile” but said underlying profitability is expected from growth in deepwater oil, liquid-rich shale and “..cost take-out”.

Odum said: “We continue to work hard on focusing the portfolio, ensuring competitive costs, developing the most valuable resources, and bringing the segment into profit.”

He went on to explain how Shell has cut costs and plans to go further: “We’ve reduced spending in resources plays this year by more than 20%. Some 30% of this is aimed at dry gas, where production is likely to decline somewhat, ahead of growth into Canada LNG later in the decade. And 70% of this spending is going into appraisal of liquids-rich plays, with growth potential. We are progressing to a more competitive cost structure here. Well costs continue to drop with 60% of new wells now at top quartile against competitors.

“The organisation is also leaner, nearly 40% fewer overhead staff and professional contractors over the last 12 months, excluding impacts from recent portfolio actions. We are on track to reduce capital and operating costs by about $500 million in 2014, excluding divestment impacts, which is a substantial cost program. Taking out cost remains a major focus for us in Upstream Americas.”

While the US Gulf is already a high-cost area, Odum pointed out the 2010 Macondo event had pushed prices even higher. He said that Shell plans to continue to tackle this issue: “The aftermath of the BP Macondo blow-out has seen higher industry costs and a decline in our production, due to the drilling moratorium and changing regulatory requirements.”

GoM production growing again
Production in the GoM is however now growing again for Shell, driven by Mars B output, Odum said, and after downtime at both Mars B and Auger, new tie-ins are planned for those installations.

“Shell continues to benchmark in the top quartile of unit costs in the Gulf of Mexico,” Odum pointed out. Cost savings have been achieved through “disciplined application of LEAN-based principles resulting in improvements in our base costs in areas such as logistics and materials. And I think there’s more to come on costs here. Exploration in the Gulf has added over 1 Bbbl of potential resources in the last five years or so. These are the barrels that will drive our production profile in the Gulf in the longer term – well into the next decade,” he continued.

Odum highlighted that the Mars B field was the first major new platform startup in the US Gulf since Macondo. “We took the final investment decision on Mars B during the 2010 [drilling] moratorium, when we saw a reduced cost opportunity in the supply chain. First oil was six months earlier than we had originally planned for, and we’ve moved more quickly than competitors who took FIDs around the same time. Mars?B is currently producing just over 40,000 boe/d from two wells. We expect to start a third well later this year, with production plateau likely in 2016,” he said.

Odum also went on to give an update on deepwater production offshore Brazil, on the operator’s BC 10 and Bijupira-Salema fields where it produced 86,000 boe/d – on a 100% equity basis – in the second quarter of this year. “This is up from 29,000 boe/d in Q2 last year, driven by the BC-10 phase?2 project and the Bijupira Salema redevelopment, which is also now complete. At Libra, a joint project team has been set up to benefit from the skills and capabilities of all the partners, and we spudded the first well last month.”