Shell’s business is going pretty strongly in Qatar, and it has been reported that the company recently awarded contracts to six SMEs as part of its localisation strategy. What do these contracts entail, and what can you tell us about your wider operations in Qatar?
We are proud to take part in in Qatar’s nationwide strategy to support Qatari small and medium enterprises (SMEs). This year, in conjunction with the Qatar Development Bank (QDB) and Qatar Shell, we held our fourth annual SME Business Opportunities Workshop, which revealed six new specific business opportunities that will enable local SMEs to join Qatar Shell’s supply chain. The opportunities were: Active and Healthy Lifestyle, CSR Program Delivery; Translation Services; Compressor Dry Gas Seals Refurbishment and Testing Services; Carbon Monoxide (CO) and Industrial Gases – Manufacturing; Plastic and Glass Sample Bottles – Manufacturing; and White Metal-Bearing Refurbishment – Services. The workshop briefed them on Qatar Shell’s tendering process, and on the financial support provided by QDB. The successful SMEs will be awarded contracts by December 2016.
I fondly remember when I spent a night at Pearl Village, where 50,000 workers were on site. Qatar Pearl is another proud achievement of ours. Pearl GTL is located 80km north of Doha, in Ras Laffan Industrial City, Qatar. It is a fully integrated facility; it encompasses offshore gas fields and onshore processing and refining. Pearl GTL has the capacity to produce 1.6bn standard cubic feet per day (scf/d) of wellhead gas offshore, from the North Field, which is then processed onshore to generate 140,000 barrels of GTL products and 120,000 barrels of natural gas products per day. Total capacity is 260,000 bpd. Over its lifetime, Pearl will process about 3bn barrels of oil equivalent (boe) from the world’s largest single non-associated gas field, the North Field, which contains more than 900tn cubic feet (tcf) of gas.
During Q1 2015, Pearl initiated its first turnaround after four years of successful operations of Train 1 of the plant, and the turnaround of the second train will take place this quarter. The plant comprises two identical ‘trains’. Pearl GTL was able to supply all of its contractually committed volumes from Train 2 during the turnaround on Train 1, and was in contact with our partner Qatar Petroleum (QP), and all key customers and off-takers, in order to manage and ensure term commitment supplies during the turnaround.
Qatargas is the world’s largest producer of liquid natural gas (LNG), shipping 42mn tonnes a year from its four major gas plants. Qatargas 4 is Shell’s first entry to Qatar’s LNG sector, sharing on- and off-shore facilities with Qatargas 3, which was developed jointly. After investing approximately $2bn in asset development, Shell owns a 30% equity share in Qatargas 4, while 70% is owned by Qatar Petroleum. Qatargas 4 combines Shell’s global leadership in LNG with Qatar’s status as the world’s largest LNG supplier.
With Shell facing difficulties due to the low oil prices, why did the company decide to acquire BG Group? How will this acquisition benefit Shell?
On 8 April, 2015 Shell announced the recommended combination with BG Group. The combination of Shell and BG is one of the most exciting developments in our industry in a generation. We have the potential to create a truly exceptional organisation and one of the world’s most exciting companies. Indeed, by combining BG’s portfolio and skill set with Shell’s capabilities, we have enhanced our integrated gas and deep-water portfolio. This is a springboard for change at Shell, moving us towards a more focused, simpler, and more profitable company – enabling us to ‘grow to simplify’, and to continue to compete in a low oil price environment. BG and Shell have long shared a deep mutual respect, and this combination allows us to build upon our respective capabilities and the strength of our combined portfolio.
Shell’s profits slumped in the first quarter of 2016. Would you attribute this simply to the impact of low oil prices, or is it related to the strain of the BG acquisition?
Shell’s integrated activities differentiate us, with our downstream and integrated gas businesses delivering strong results and underpinning our financial performance, despite the continued low oil and gas prices.
We continue to reduce our spending levels, to capture cost opportunities, and manage the financial framework in today’s lower oil price environment. The combination with BG is off to a strong start, as a result of detailed forward planning before the completion of the transaction. This results in accelerated delivery of the synergies from the acquisition, and at a lower cost than we originally set out. Putting all of this together, capital investment in 2016 is expected to be around $29bn, which will be some 35% lower than combined Shell and BG investment in 2014.
Annual operating expenses, excluding identified items, are trending towards a run rate of $40bn compared with the 2014 combined spend of around $53bn. In practice, we expect to absorb BG’s capital investment and operating expenses during 2016, with no net increase overall, compared with Shell stand-alone in 2015.
We will continue to manage spend through dynamic decision-making across the organisation, taking advantage of opportunities from both the deflating market and the two companies coming together. The completion of the BG deal has reinforced our strategy and strength against the backdrop of hugely challenging times for our industry. For Shell and our shareholders, this is a unique opportunity to reshape and simplify the company.
It has been reported that Shell has reduced its spending plans by a further 10 to 20% this year due to the merger cost. How will this reduced spending plan be implemented?
We have delivered major reductions in operating costs already, with more to come. Shell’s stand-alone costs were reduced by $4bn, or around 10%, from 2014 to 2015, and we are expecting a 20% reduction between 2014 and the end of 2016 on a combined basis. This is from a combination of the synergies from BG and a ‘lower forever’ mentality within Shell. Some 40% of our operating costs are direct staff costs and there are significant reduction programmes underway there. Our capital investment will be managed in the range of $25bn to $30bn per year to 2020 as we improve capital efficiency and develop more predictable new projects.
Shell has announced increased job cuts worldwide this year as it seeks to navigate through the low oil price era. In which particular countries or regions will these lay-offs be executed and how will they be managed?
The reductions we’ve announced are part of a global programme of job reductions at Shell. Last year, in response to the oil price downturn, we made the tough but necessary decision to remove 7,500 Shell staff and direct contractor roles, and this has now been completed. Separately, as previously announced, a further 2,800 global staff reductions were initially identified as part of the BG integration, which is now well underway.
These are tough times for our industry and we have to take difficult decisions to ensure Shell remains competitive through the current, prolonged downturn. In 2016, the number of job reductions – in response to low prices and as a result of the BG integration – is expected to total at least 5,000 globally. This number includes the 2,800 integration-related roles previously announced.
In January this year, Shell announced it would be pulling out of the Bab Sour Gas Project in Abu Dhabi. How did Shell initially get involved with ADNOC, and what drove the company to quit the project?
In April 2013, ADNOC awarded the Bab Sour Gas Project to Shell. The project envisioned the construction of a new 1bn scf/d sour gas processing plant that would produce gas for the domestic market in Abu Dhabi and sulphur for export. The development and operation would have been as a stand-alone ADNOC-Shell joint venture (60% ADNOC, 40% Shell).
In January of this year, Shell decided to exit the joint development of the Bab sour gas reservoirs and to stop further joint work on the project. Following a careful and thorough evaluation of technical challenges and costs, Shell decided to exit the joint development of the Bab sour gas reservoirs with ADNOC in the emirate of Abu Dhabi, and to stop further joint work on the project. The evaluation concluded that, for Shell, the development of the project did not fit with the company’s strategy, particularly in the economic climate prevailing in the energy industry.
What other partnerships does Shell have with ADNOC, and how do you wish to strengthen your operations in the UAE?
Shell has been present in Abu Dhabi since 1939 and remains committed to Abu Dhabi and the UAE. We see our involvement continuing in the long-term and look forward to continuing to work with our partners in ADNOC and its subsidiary companies. At present, ADNOC and Shell’s business in Abu Dhabi consists of a 15% interest in Abu Dhabi Gas Industries Limited (GASCO).
Moving on to Shell’s operations in Saudi Arabia, how you wish to expand in the kingdom? Is Shell eyeing any specific joint venture projects with Saudi Aramco?
This year, Royal Dutch Shell celebrated its 75th anniversary in the Kingdom of Saudi Arabia, a journey that began with the refuelling of the late King Abdulaziz’s first airplane.
We are active in refining, in the manufacture of petrochemicals, in the blending and marketing of lubricants, and in aviation refuelling. We are part of the following businesses: SASREF, SADAF, JOSLOC and PASCO.
Saudi Arabia has been at the forefront of the global energy industry since the late 1930s, and it is our long-term intention to remain a partner in the kingdom’s energy future. We employ more than 2,000 staff, the vast majority of whom are Saudi nationals (over 80%). We actively contribute to the society at large, and we continue to look for new business opportunities with Saudi partners.
What can you tell us about Shell’s gas production capabilities? Does the company have plans to boost its gas portfolio, or would you rather focus on the upstream oil E&P business?
Our LNG expertise goes beyond liquefaction plants. We’re involved in every stage of the LNG value chain: from the upstream (finding the fields and extracting the gas), to the downstream (liquefying the gas), to shipping, and to turning the LNG back into gas and distributing it to customers. We also have the necessary logistical, contractual, financing and marketing skills to put together a complex LNG mega-project and make it happen. That breadth of expertise is essential in creating confidence with key stakeholders: the investment banks, contractors and partners, as well as the resource-holding nations.
We believe that floating liquefied natural gas (FLNG) will write the next chapter in the history of the industry. Our Prelude FLNG builds on our existing capability and LNG leadership. LNG makes it increasingly easy to transport natural gas from expanding supply hubs, like Qatar and Australia, to demand-centres across Asia. Today, Shell is one of the world’s largest LNG shipping operators. We manage and operate 44 of the world’s LNG carriers, around 11% of the global fleet.
We expect to see global gas demand growing at approximately 2% per year until 2030. This is expected to be driven by the growing gas import needs of China, the Middle East and Europe, but also by new importers such as India, Malaysia, the Philippines, Singapore, Thailand and Vietnam. Other countries are also expanding their import capacity, including South Korea, Thailand, China and India. By 2050, Shell’s scenario planners expect global energy consumption to double from its level at the start of this century.
How aggressively is Shell pursuing its ambitions in Iran?
It is premature to discuss any projects in which Shell may or may not be involved. We review our growth portfolio on a regular basis and do not exclude any countries that are open to foreign investment. Iran has significant oil and gas resources.
Shell reportedly paid nearly $2bn in dues to Iran earlier this year. Assuming all dues are settled now, would Shell bid for the new Iranian Petroleum Contracts that the Islamic Republic is set to tender soon?
We review our growth portfolio on a regular basis and do not exclude any countries that are open to foreign investment. Iran has significant oil and gas resources. As in any other case, we would explore potential business opportunities aligned with our long-term strategy.
