Category: Nieuws

LONDON (Reuters) – Royal Dutch Shell is looking to slash up to 40% off the cost of producing oil and gas in a major drive to save cash so it can overhaul its business and focus more on renewable energy and power markets, sources told Reuters.

Shell’s new cost-cutting review, known internally as Project Reshape and expected to be completed this year, will affect its three main divisions and any savings will come on top of a $4 billion target set in the wake of the COVID-19 crisis.

Reducing costs is vital for Shell’s plans to move into the power sector and renewables where margins are relatively low. Competition is also likely to intensify with utilities and rival oil firms including BP and Total all battling for market share as economies around the world go green.

“We had a great model but is it right for the future? There will be differences, this is not just about structure but culture and about the type of company we want to be,” said a senior Shell source, who declined to be named.

Last year, Shell’s overall operating costs came to $38 billion and capital spending totalled $24 billion.

Shell is exploring ways to reduce spending on oil and gas production, its largest division known as upstream, by 30% to 40% through cuts in operating costs and capital spending on new projects, two sources involved with the review told Reuters.

Shell now wants to focus its oil and gas production on a few key hubs, including the Gulf of Mexico, Nigeria and the North Sea, the sources said.

The company’s integrated gas division, which runs Shell’s liquefied natural gas (LNG) operations as well as some gas production, is also looking at deep cuts, the sources said.

For downstream, the review is focusing on cutting costs from Shell’s network of 45,000 service stations – the world’s biggest – which is seen as one its “most high-value activities” and is expected to play a pivotal role in the transition, two more sources involved with the review told Reuters.

“We are undergoing a strategic review of the organisation, which intends to ensure we are set up to thrive throughout the energy transition and be a simpler organisation, which is also cost competitive. We are looking at a range of options and scenarios at this time, which are being carefully evaluated,” a spokeswoman for Shell said in a statement.

Shell’s restructuring drive mirrors moves in recent months by European rivals BP and Eni which both plan to reduce their focus on oil and gas in the coming decade and build new low-carbon businesses.

The review, which company sources say is the largest in Shell’s modern history, is expected to be completed by the end of 2020 when Shell wants to announce a major restructuring. It will hold an investor day in February 2021.

Speaking to analysts on July 30, Shell Chief Executive Ben van Beurden said Shell had launched a programme to “redesign” the Anglo-Dutch company.

LOW-CARBON FUELS

Teams in Shell’s three main divisions are also studying how to reshape the business by cutting thousands of jobs and removing management layers both to save money and create a nimbler company as it prepares to restructure, the sources said.

Shell, which had 83,000 employees at the end of 2019, carried out a major cost-cutting drive after its $54 billion acquisition of BG Group 2016, which has helped boost its cash generation significantly in recent years.

Shell’s operating costs, which include production, manufacturing, sales, distribution, administration and research and development expenses, fell by 15%, or roughly $7 billion, between 2014 and 2017.

But the sharp global economic slowdown in the wake of the COVID-19 epidemic coupled with Shell’s plans to slash its carbon emissions to net zero by 2050 have led to the new push.

Shell cut its 2020 capital expenditure plans by $5 billion to $20 billion in the wake of the collapse in oil and gas prices due to the pandemic amid warnings it could have lasting effects on global energy demand.

Van Beurden said in July that Shell was on track to deliver $3 billion to $4 billion in cost savings by the end of March 2021, including through job cuts and suspending bonuses.

He said travel restrictions during the pandemic had accelerated the digitalisation of Shell while machine learning was being rolled out to minimise outages and shorten maintenance time at refineries, oil and gas platforms and LNG plants.

Besides cutting costs at its downstream retail business, Shell is pressing ahead with plans to reduce the number of its oil refineries to 10 from 17 last year. It has already agreed to sell three.

The review of refining operations also includes finding ways to sharply increase the production of low-carbon fuels such biofuels, chemicals and lubricants. That could be done by using low-carbon raw materials such as cooking oil, one source said.

Reuters, Ron Bousso, September 21

It’s been a wild and bumpy ride for OPEC+ this year. The consortium, consisting of the traditional members of the Organization of the Petroleum Exporting Countries plus oil and gas superpower Russia, was largely responsible for the huge collapse in oil prices toward the end of April. After a huge drop in oil demand corresponding with the devastating spread of the novel coronavirus around the world, an OPEC+ strategy meeting turned into a spat between Russia and Saudi Arabia which then turned into an all-out oil price war and massive global oil glut. The oil storage shortage created by this glut would go on to push the West Texas Intermediate crude benchmark into previously-unthinkable negative territory, closing out the day on April 30th at nearly $40 below zero per barrel.

OPEC+ has since reconciled and once again banded together to address the oil market crisis, making myriad pledges and severe production cuts to bolster crude oil prices. But many of the countries that made those pledges have fallen far short of their promises. “OPEC reached a historic deal to cut output by 9.7 million barrels per day in April, but a number of countries fell significantly short in meeting their production targets,” reports Markets Insider.

But, just this week Iraq, OPEC’s second-biggest member just made a huge commitment to cut its oil production in the coming months. After a Thursday night conversation between Iraqi and Saudi leadership, Baghdad “made a commitment to cut oil production by 400,000 barrels per day in August and September,” a massive uptick from the nation’s relatively paltry July production cut of 11,000 barrels per day.

But while the oil market is now recovering and countries like Iraq are starting to fall in line, this may not indicate smooth sailing for the international oil consortium. “Rebounding oil prices have the potential to show the cracks that already exist in the delicate cooperation between the powerful oil-producing nations,” the Wall Street Journal reported this week in an article entitled “How a Tenuous Saudi-Russia Oil Alliance Could Melt Down.”

The article recounts OPEC’s rough, tough year(s), remarking that “Saudi Arabia, the dominant force of OPEC, might as well have been herding cats in recent years trying to bring order to the unruly cartel.” At first, the addition of Russia to bring the “+” to OPEC+ was a godsend for the group and a boon to oil markets, but now Riyadh and Moscow’s extremely different ambitions could spell doom for the cartel.

In light of the fact that many OPEC+ members have been complying with production cuts and that these cuts seem to be working, in mid-July, the cartel actually agreed to let OPEC members’ overall production to increase by a considerable 1.6 million barrels a day. “The latest adjustment was a reflection of a demand picture that seems to be improving,” reports the Wall Street Journal. “Yet that very development could hobble cooperation between Saudi Arabia and Russia going forward.”

As history has taught us over and over, alliances more often than not require a common enemy–in this case a floundering oil market. “Under $40 [a barrel], they were able to come together. The higher the price, the harder it will be to get Russia to go along with continued production cuts—especially once you get to $50 a barrel for Brent Crude,” Gary Ross, Chief Executive Officer of Black Gold Investors told the Wall Street Journal.

And now, there’s not enough to keep Saudi Arabia and Russia’s diverging visions from, well, diverging. The two nations at the helm of OPEC+ publicly claim vastly different break-even prices and the recent easing of austere production measures could be the harbinger of doom for the already delicately-balanced cartel. And a dramatic failure for OPEC and its consortium of precarious oil autocracies could spell serious geopolitical turmoil for the Middle East, and by extension, for all of us in this global village.

By Haley Zaremba for Oilprice.com
Photo by Mohammed Hassan on Unsplash

Saudi Arabia’s state-controlled oil giant pressed ahead with a plan to pay $75 billion in dividends this year despite sliding profit and a surge in debt, as the kingdom battles a widening budget deficit.

Saudi Aramco said net income for the three months ending in June fell to 24.6 billion riyals ($6.6 billion), down 73% from a year earlier, after crude prices collapsed. Aramco will pay a dividend of $18.75 billion for the quarter, most of it to the government, which owns around 98% of the company’s stock.

Aramco’s performance and demand for energy will probably improve over the rest of the year as nations ease coronavirus lockdowns, according to Chief Executive Officer Amin Nasser.

“We are seeing a partial recovery in the energy market as countries around the world take steps to ease restrictions and reboot their economies,” he said.

The results cap a turbulent period for the world’s biggest oil exporter. Prices briefly turned negative in the U.S. in April as the virus battered the global economy and Aramco slashed hundreds of jobs.

Saudi Arabia and Russia led a push by the Organization of the Petroleum Exporting Countries and its partners to reduce production and prop up crude prices. Although they’ve rallied, Brent is still down 33% this year.

Unlike Aramco, rivals such as BP Plc and Royal Dutch Shell Plc have cut their dividends.

“We are committed to delivering sustainable dividends through market cycles, as we have demonstrated this quarter,” Nasser said. “Our intention is to pay $75 billion, subject to board approval, of course, and market conditions.”

Saudi Arabia generates most of its revenue from crude, and its budget deficit is set to exceed 12% of gross domestic product in 2020, according to the International Monetary Fund. That would be the widest since 2016, adding pressure on Aramco to maintain dividend payments.

The shares of Aramco, which Apple Inc. dethroned last month as the world’s most valuable listed company, rose 0.3% to 33.05 riyals in Riyadh on Sunday. They’ve declined 6.2% this year, much less than the likes of Exxon Mobil Corp., which has fallen 38%, and Shell, down 50%.

Aramco’s shares have fallen far less than those of the oil majors
The outlook for Aramco will remain uncertain for “some time,” Nasser said. Still, he expressed confidence about the company’s business and strategy in the third quarter and said oil consumption in Asia, Aramco’s largest regional market, has almost returned to pre-coronavirus levels.

The Dhahran-based firm’s gearing ratio soared to 20.1% at the end of June from minus 5% in March. That was due largely to the debt Aramco took on when it bought chemicals company Saudi Basic Industries Corp. for $70 billion. The deal was funded by a loan from the Saudi Arabia’s sovereign wealth fund, which Aramco plans to finish repaying in 2028.

Aramco has yet to draw down a $10 billion revolving credit facility, according to Nasser. The company said in June that it might issue more bonds or loans to meet its dividend commitment.

Capital expenditure will be at the lower end of the $25 billion-to-$30 billion range set in March, it said. That’s already down from the company’s plan at the start of 2020 to spend between $35 billion and $40 billion.

Aramco is still working on a deal to buy a $15 billion stake in Reliance Industries Ltd.’s refining and chemicals business, Nasser said, without giving any detail on timing. The Indian firm’s Chairman Mukesh Ambani said in July that a transaction had been delayed.

A deal with Reliance would help Aramco join the ranks of the top oil refiners and chemical makers. It is already a major supplier of crude to India, while Reliance sells petroleum products, including gasoline, to the kingdom.

Aramco’s Fadhili natural-gas plant reached full production capacity of 2.5 billion standard cubic feet during the second quarter. The company is boosting gas output to feed local businesses and replace valuable crude that power plants burn to meet rising demand for air-conditioning during the summer. Aramco started the Fadhili gas plant last year and has gradually ramped up output.

By Matthew Martin, Bloomberg, August 9 2020

Despite a 33% rise since the March 23 lows of this year, at the current price of around $43 per share we believe Exxon Mobil (NYSE: XOM) has reached its near-term potential. XOM’s stock has rallied from $32 to $43 off the recent bottom compared to the S&P which moved 46%. The stock lagged broader markets because of the low demand for gasoline, diesel, and jet fuel.

XOM stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. The healthy rise since the March 23 lows has primarily been due to production curtailments, operational expense reduction, and capex cuts. While EIA expects global crude oil inventories to ease during the third quarter, the resurgence of Covid cases in the U.S. and other countries has led to the second round of restricted living. Per Exxon’s Q2 report, gasoline and diesel demand is likely to recover by the fourth quarter while the demand for jet fuel is expected to remain subdued. Thus, Exxon’s trailing P/E multiple has low near-term upside potential as the company tries to achieve operational efficiency amid falling revenues.

In the past two years, Exxon Mobil’s Revenues have observed an 8.4% growth mostly from rising benchmark prices and a slight uptick in production volumes. However, the net income margin declined by 3-percentage-points – dragging the net income down by 31% since 2017.

Consistent with the trajectory in benchmark crude oil prices, Exxon Mobil’s P/E multiple surged in 2019 due to pent up demand but, subsequently dropped as the coronavirus crisis was declared a pandemic by the WHO. We believe the stock is unlikely to see a significant upside after the recent rally due to potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove -43% Change in Exxon Mobil’s Stock between 2017 and now? has the underlying numbers. XOM’s P/E multiple changed from 16 in 2017 to 20 in 2019. While the company’s P/E is now 12.5 – it is comparable to the lows observed in 2018.

So what’s the likely trigger and timing of an upside?

The global spread of coronavirus has led to a substantial drop in energy consumption across the world. Per Baker and Hughes, the international oil & gas rig count has fallen by 50% since the beginning of the year – triggering expectations that a prolonged slump in energy demand is likely to remain for the full year. With the U.S. being the largest supplier and consumer of crude oil, a sharp drop in commercial crude oil inventory levels is the key indicator to be observed for demand recovery. Though market sentiment can be fickle, and evidence of a surge in new Covid cases could further delay a recovery in XOM’s stock.

Trefis Team in Forbes, August 5 2020, Photo by hidde schalm on Unsplash

As Bernard Looney took to the stage in London in February to announce his plan to transform BP Plc for a low-carbon future, the U.K. capital confirmed its first case of Covid-19.

The oil giant’s chief executive officer couldn’t have known how the virus would shake the foundations of his industry: since the start of the pandemic, BP has said it will write off as much as $17.5 billion of fossil-fuel assets, slash 10,000 jobs and exit the petrochemicals business. And on Tuesday, it may announce the first dividend cut since the Macondo oil-spill disaster a decade ago.

But despite the pain for shareholders and employees, the crisis is giving Looney the opportunity to accelerate the big changes needed to fulfill his vision.

The global spread of coronavirus “only reaffirms the need to reinvent our company,” Looney now says. The pandemic has created a world that pumps less oil, gets more of its energy from renewable sources and emits less carbon dioxide — exactly what he says BP should do.

“This backdrop of battered demand presents a lot of challenges, but it also presents opportunity,” said Luke Parker, vice president of corporate research for Wood Mackenzie Ltd.

The measures BP has taken so far aren’t unique, either in the current slump or in the periodic downturns that have afflicted the industry over the decades. But there’s a symbolism that wasn’t there before.

Quitting a core business like chemicals is a good way to show that the future looks different. Taking an ax to billions of dollars of oil and gas asset values demonstrates that “you’re a company that believes this transition is going to happen and that the world will be on a 2-degree path,” Parker said.

Most importantly, the company is widely expected to follow Royal Dutch Shell Plc this week by cutting its dividend, potentially freeing up cash to invest in clean energy.

Difficult decisions like this have been made easier by the coronavirus crisis, according to JPMorgan Chase & Co.’s head of EMEA oil and gas, Christyan Malek.

“What you’re seeing BP do is getting its house in order” before announcing a detailed transformation plan in September, Malek said. “BP have been putting the building blocks in place — the impairments, the divestments. And we believe the dividend cut is the next building block.”

Reducing BP’s $8 billion annual shareholder payout would address the biggest unanswered question about Looney’s transition plan: Where is the money going to come from?

Even before the coronavirus lockdowns crashed energy prices, BP was saddled with more debt than any of its peers. Its gearing — the ratio of debt to equity — is poised to rise as high as 48%, according to RBC Capital Markets. That would be by far the highest in the industry, and could lead to questions about its credit rating.

While the measures Looney has taken so far may help him achieve BP’s long-term goals, in the short-term shareholders appear unimpressed. The company’s stock is down 42% this year, a steeper drop than the 37% decline in the Stoxx Europe 600 Oil & Gas index.

Low-Carbon Spending

Without a detailed plan of how BP is going to become a clean-energy giant, the cost of the transformation remains largely theoretical. What’s clear, is that at the very least the oil major will have to boost spending on low-carbon fuels significantly from the current $500 million a year to billions.

The other route would be acquisitions, following on from its 130 million-pound ($170 million) purchase of U.K. car-charging company Chargemaster in 2018. Such assets typically have positive cash flow and can be integrated easily into oil majors’ portfolios, said Bruce Duguid, head of stewardship, EOS at Federated Hermes.

As Looney, 49, reshapes BP, doubts linger about the strategy. Sitting in the audience of the great unveiling in February was former CEO John Browne, who tried to steer the company into renewables in the early 2000s with the ill-fated “Beyond Petroleum” campaign.

“We moved too soon,” Looney said in a recent Instagram post. “We lost money on much of what we had built up.”

Bob Dudley, Looney’s immediate predecessor, has repeatedly cautioned against moving too fast into low-carbon fuels, saying the potential failure of new technologies could lead to financial ruin.

The key to success will be keeping investors on board. There’s strong support for BP’s overall change in direction, with shareholders voting overwhelmingly in favor of climate resolutions in 2019, according to Hermes’ Duguid. But it could be a painful journey, and there’s a risk shareholders have a change of heart if Looney does cut the dividend.

“You can use the macroeconomic backdrop as a way to justify the means, but you still need the end result to work,” said JPMorgan’s Malek.

(Updates with share price information in 13th paragraph.)

By Laura Hurst, Bloomberg, 2 August 2020,
Photo by Morning Brew on Unsplash