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Cheap oil forcing a rethink, says Royal Dutch Shell

  • The Wall Street Journal

Royal Dutch Shell has presented a pessimistic vision for the future of oil, even as the company reported success in generating cash during a prolonged energy downturn.

Shell has cut costs and said it was preparing for a world in which crude prices might never regain precrash levels and petroleum demand declined.

Shell chief executive Ben van Beurden said the company had a mindset that oil prices would remain “lower forever” .

“We have to have projects that are resilient in a world where oil has peaked,” Mr van Beurden told reporters on a conference call discussing the company’s second-quarter financial results. “When it will happen we don’t know, but that it will happen we are certain.”

The views of the British-Dutch oil company reflect the transition under way in a global energy industry grappling with the twin forces of an oil supply glut and a looming consumer shift away from petroleum.

These trends are even more pronounced for oil companies in Europe, where governments are trying to phase out vehicles with internal combustion engines, encourage electric cars and reduce overall carbon emissions.

Experts differ on the timing of peak oil demand. In its most guarded scenario, Shell sees oil peaking within the coming decade. The International Energy Agency says it’s more like 2040.

The advent of declining demand — after decades of unrelenting growth — would likely erode the value of oil and the companies that produce it.

On the other hand, US energy giants such as Exxon Mobil and Chevron have said peak oil demand is still far off. And even when oil consumption eventually stops growing, Shell isn’t expecting it to drop off a cliff.

“It doesn’t mean it’s game over straight away,” Mr van Beurden said. “There will be a continued need for investment in oil projects.”

Mr van Beurden’s comments are broadly in line with Shell’s overall strategy of moving towards producing fuel for electricity, such as natural gas and even renewables and focusing on keeping costs low.

The company now produces more gas than oil. It is also building a massive wind farm off the Dutch coast and envisions spending as much as $US1 billion ($1.25bn) a year on developing new energy sources such as renewables by decade’s end.

The company posted what analysts said was a strong second quarter. Shell’s equivalent of net profit rose to $US1.9bn, from $US239 million a year earlier, and its cash flow from operations — a metric that has become increasingly important to investors — soared to $US11.3bn. The company said it generated $US38bn of cash from its business over 12 months, enough to cover dividend payments and pare debt.


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