Shell Says Fundamentals of Business Still Strong As It Books $16.8 Billion Impairment

SEATTLE (Oil Monster): Shell on July 30 signaled likely further reductions in upstream and LNG production in the third quarter as it defended its business model, including a big shift into natural gas in recent years, following massive coronavirus-related impairments.

In its Q2 results, Shell confirmed a financial impairment of $16.8 billion, or 6.1% of the company's average capital employed, of which almost half relates to its Australian gas and LNG projects -- the Queensland Gas Company and Prelude Floating LNG -- with $4.7 billion relating to a broad swathe of upstream assets, including US shale, assets in Brazil and Europe, and individual assets in Nigeria and the US Gulf of Mexico. The total also included $4 billion relating to refineries in Europe and North America.

Shell had already flagged likely impairments when it cut its crude price assumptions at the end of June.

It said upstream oil and gas production in the current quarter would be in a range of 2.1 million-2.4 million b/d of oil equivalent, down from 2.61 million boe/d in Q3 2019, and production from its LNG-focused "integrated gas" unit would be in a range of 820,000-880,000 boe/d, down from 957,000 boe/d a year earlier, with LNG liquefaction expected to fall to 7.6 million-8.2 million mt, from 8.95 million mt.

Production in Q2 was hit by asset sales and curtailments by OPEC+ nations, Shell said. Chief financial officer Jessica Uhl said output cuts by OPEC+ countries would account for about 70% of Q3 production reductions, with the remainder mainly a result of Shell holding off North American shale production in the expectation of prices recovering later.

Shell's overall oil and gas production fell by 6% on the year in Q2 to 3.38 million boe/d, with upstream oil output falling a more modest 2% to 1.61 million b/d, and upstream gas production falling 17% to 4.67 Bcf/d. It operates in a number of OPEC+ countries that have pledged to compensate for under-compliance in the early stages of the OPEC+ cuts.

The company flagged a likely pick-up in refining in the current quarter as coronavirus lockdowns ease, particularly in Europe, with utilization expected to be in a range of 68%-76%, compared with 70% in Q2.

However, Uhl reiterated the company's plans to reduce its downstream footprint from 15 refineries to 10 "over time," saying: "Some of the refining assets that we've impaired this quarter will be strategic for us as we evolve these into new low-carbon value chains."

Courtesy: www.spglobal.com