Shell hasn’t impressed the market with its results today, especially after BP beat expectations rather more handily on Tuesday with its blockbuster savings. Shell’s $1bn savings looked smaller by comparison, even though the company confirmed it is laying off some 5 per cent of its workforce.
CFO Simon Henry, who presented the results today, maintained a very bearish tone on the macroeconomic outlook and on the oil markets in particular, pointing out the familiar story of inventories: an extra 1m barrels, he says, would need to come out of stocks every day for a year to take stored oil back to average levels.
And he maintains that the oil price is too high:
Our perspective is that the oil price might be a little bit rich at the moment. Certainly for planning terms, it’s higher than we would want to plan on at the moment. There’s simply too much stock to support prices at $70 to $80 in the short term.
Shell however clearly has quite a different view on the longer term. It is investing heavily in future production – $32bn this year. This will help bring another 1m-odd barrels of oil equivalent online in 2011 and 2012. But some of those projects are going to be quite expensive, such as Canadian oil sands and gas-to-liquids in Qatar.
A chart included in a presentation by executive Malcolm Brinded in June illustrated this: it suggested about three-quarters of their production capacity can work at less than $50 a barrel, but the last few percentage points require something like $70 a barrel or more. Of course lower supplier costs could help, but with prices now sitting around $80 – whether justified or not – it’s not necessarily safe to bet on that.
Meanwhile refining continued to be the train wreck it is for much of the industry. Shell decreased its refining capacity 8 per cent to cope with the downturn in margins. Asia, he says, is a little more positive. But in European refining, Henry says, substitution and efficiency measures mean that demand recovery for products may never come:
Fundamentally, we don’t think European demand is going to recover significantly, maybe ever, and that’s why we’ve been looking to reduce our capacity… The demand for transport fuel has been declining for three – four years now.
Shell has already turned its European refining “down to the minimum”, Henry said – they were at the point where reducing capacity further would make it not worthwhile keeping the plants running.
Do oil sands plus peak demand spell doom for oil majors? (FT Energy Source, 27/07/09)
Shell’s outlook for oil production: Why $70 a barrel matters (FT Energy Source, 12/06/09)