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Shell CEO calls shale revolution ‘hype’ and writes off $2.1 billion as shale ‘revolution’ spreads to North Africa

Global Shale Gas 2012

Source: Reuters

If one of the world’s largest energy producers considers exiting a business and calls it ‘hype,’ we should consider looking into the reasons.  Some would argue that Shell got into the US shale business late, thus overpaying for assets.  We reported earlier on the shale revolution here and explained why it’s hyped up, mainly from Wall Street firms looking to cash-in on a trend.

Shell has invested at least $24bn in so-called unconventional oil and gas in North America. But it is a bet that has yet to pay off. Its North American upstream business has struggled to turn a profit and in August Shell announced a strategic review of its US shale portfolio after taking a $2.1bn impairment. “Unconventionals did not exactly play out as planned,” Mr Voser said.

Like other majors, it entered the American shale sector late in the game and was accused by some investors of overpaying for assets. Its earnings were then hit when a supply boom pushed US gas prices to 10-year lows.

As well as its $2.1bn writedown, mostly related to its US tight oil assets, Shell also said its US exploration and production business was lossmaking and would likely remain so to the end of the year and possibly beyond.

Just last month, Shell said it had put its acreage in the Eagle Ford shale in Texas up for sale, as part of a strategic review of its US shale portfolio.

Mr Voser said Shell’s Upstream Americas business was in the red because of a “strategic decision to slow down” on shale in the face of low gas prices. “Therefore you are hit with more than $3bn of depreciation whilst you don’t have the revenues against it,” he said.

He also acknowledged that exploration results in the US shales had been disappointing. “We expected higher flow rates and therefore more scalability for a company like Shell,” he said.

Shell’s US unconventional oil and gas operation was an “emerging strategic business which needs attention, needs fixing over the next two, three, four years”. He said an expected increase in the company’s tight oil production in the US “will help us get into a more reasonable profit and cash position in the future”.

Mr Voser also said rhetoric about the US shale revolution being exported to other countries was “hyped”, and that the rest of the world was in an early “exploration phase” which could yield “negative surprises”.

He singled out China, where Shell has drilled 22 wells, as one of the most prospective countries for shale gas, but warned that costs there were higher than in the US.

 Read the full story from the Financial Times.

It’s no surprise that costs are much higher in shale production than in conventional production.  What is worth noting is that shale production costs are higher outside the US, such as China as Voser points out above.  The new shale revolution is currently being exported to North Africa in countries such as Libya and Algeria.  Repsol, the Spanish energy producer, is making a big bet on North Africa.

 

US Shale Well Life

Source: Business Insider

  

For shale extraction to continue rising, more and more wells needed to be drilled because the typical life of a well lasts 5 years or less.  Well life has surprised many investors in this field.  The need to drill new wells just to keep production constant has left investors with fewer returns, some with losses.  Exporting the shale hype to other countries will end up creating only more frustrated investors…. but happy bankers.