As with most oil companies, 2015 has been a rough year for Royal Dutch Shell. The Anglo-Dutch company reported a third quarter loss of $6 billion, which included $7.9 billion in impairment charges.
During its third quarter earnings call, Shell’s CEO Ben van Beurden summed up the company’s strategy, emphasizing restraint. “Grow to simplify” is how he put it. What that means in practice is scrapping the Arctic campaign; pulling out of the expensive Carmon Creek oil sands project in Canada; shedding assets in the less desirable parts of North American shale; selling assets elsewhere around the world, including Nigeria; and focusing on its merger with BG, which is a big bet on LNG.
Spending billions of dollars on megaprojects has fallen out of favor. In an effort to correct damaged balance sheets and still protect dividends, exploration budgets are getting chopped. Compared to 2013 spending levels, the oil majors will halve their exploration budgets next year to just $25 billion, according to Tudor, Pickering, Holt & Co.
Related: Shale Gas Rig Count Could Implode Here If Prices Don’t Rebound
Consequently, fewer projects are moving forward. While there are still some megaprojects under development, they were greenlighted years ago. Moving forward, the focus will be on smaller, less risky projects that have lower upfront costs.
To illustrate the point, one potential candidate could be Shell’s latest discovery. Last week Shell announced a discovery in the Gulf of Mexico, a find that could potentially yield 100 million barrels of oil equivalent (boe). The Kaikias field is located near a handful of Shell’s existing facilities in the Gulf of Mexico, including some production platforms and networks of subsea pipelines. So while the field itself may not be massive, Shell believes it may be able to develop Kaikias cheaper than it otherwise would be able to if it was starting from scratch.
In fact, given current market conditions – with WTI trading in the low-$40s per barrel, there is a much smaller appetite on the behalf of the oil majors for massive greenfield projects in remote locations. Shell itself learned that lesson the hard way with its failed Arctic campaign. To be sure, there was an element of a “sunk cost” mentality – Shell had already poured in seven years of work and north of $6 billion on its venture in the Chukchi Sea, so seeing the season through and drilling the well in the Burger prospect may have made sense. However, with Arctic oil some of the most expensive oil, after drilling a dry well the undertaking was quickly shelved.
Related: Big Oil: Which Are The Top 10 Biggest Oil Companies?
As a result, Shell is narrowing its ambitions and focusing much more on “easier” projects. With Gulf of Mexico infrastructure already built, Shell’s Kaikias discovery won’t be a heavy lift. And while the field won’t substantially move the needle in terms of Shell’s profits or overall production, it is the kind of modest project that is palatable at this point for a company whose revenues have taken a huge hit. Producing from the Kaikias would allow several production facilities – the Mars, the Mars B, and the Ursa – to access new sources of oil. Those facilities have a combined capacity of 500,000 barrels per day but have seen flows decline as existing fields age, according to Fuel Fix.
Related: Why The Future For Energy Storage Just Got Brighter
In other words, the Kaikias “is not a game-changer in the Shell portfolio,” as Rebecca Fitz of IHS Energy told Fuel Fix in an interview. “But this discovery is completely consistent with what Shell is trying to do from its streamlined exploration program. If you can deliver 100 million barrels of crude oil and have all the infrastructure built, that should be a pretty high value, quick lead-time tie-back development.”
For oil producers navigating the tough waters of the sub-$50 oil, that is the best they can hope for at this point. And with the IEA predicting oil remaining below $80 per barrel through the rest of the decade, companies are settling in for a lengthy period of low prices.
By James Stafford of Oilprice.com
More Top Reads From Oilprice.com: