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Shell gets everything right except producing oil

Andy Critchlow: JULY 27, 2017

LONDON (Reuters Breakingviews) – Royal Dutch Shell is great at producing profit, but less so at producing oil. The Anglo-Dutch energy giant has more than tripled its earnings in the second quarter, helped by the strong performance of its downstream refining business and recovering prices. With its debt falling too, the company is doing the right things for shareholders – except in the crucial area of pumping more fuel.

At first glance, Shell’s financial performance suggests that three years in the doldrums for big oil majors may have come to an end. On Thursday, the company reported an impressive 245 percent year-on-year rebound in clean earnings to $3.6 billion for the three-month period ending in June. Prices, which recovered from a slump last January below $30 per barrel, have helped, but there is more to it.

Downstream refining and petrochemicals also performed strongly, with earnings in the segment on a current cost of supplies basis up by almost 40 percent in the quarter. The extra cash, along with money from divestments, has helped reduce debt built up from the acquisition of gas producer BG Group. Net debt fell by roughly $10 billion to $66 billion at the end of June, compared with a year earlier.

Where Shell could do better is in production. Output available for sale of around 3.5 million barrels of oil equivalent per day is 7.4 percent below the previous quarter. Worryingly, that’s out of step with its European rival Total, which also reported quarterly earnings on Thursday and avoided a slump in the quarter.

Granted, not all of Shell’s production stagnation is within its control. It cannot change the caps imposed by the Organization of the Petroleum Exporting Countries (OPEC) where it operates. Barrels will also be lost as it continues to sell unwanted assets such as its Canadian oil sands projects. The full restart in June of its broken Pearl gas-to-liquids plant in Qatar also came too late to boost its figures.

Of course, if oil prices stay low forever, dwindling production might not be so bad. But if the price picks up, investors will expect to see more of the stuff getting pumped. Shell probably ought to bank on that being the case.


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