The Times: COMMENT: Well, well, well: “Shell has made six "significant finds" since the start of last year and they might have been involved in more had it not, famously, sold for a pittance its stake in the fruitful Mangala field in India to Cairn.”: “…Shell's great lucky break was that its annus horribilis has coincided with the strongest oil market for more than 20 years. (ShellNews.net)

Posted 24 September 2004

Favoured by a lucky break, Shell has prioritised discovering new reserves. As well it might. By Mike Verdin

The world of the oil giants is a real zoo. Just look at Shell, which has suffered a beastly few months.

First the company dropped a mammoth clanger. Then it ditched its top dog. Now the oil giant has put out an order for big cats.

Since January, Shell has ditched 20 per cent of proven stocks, and axed its chairman, Philip Watts. Now the big cats hold the solution to the company's reserves problems.

"Big cats", in oil exploration terminology, are wells holding more than 100 million barrels of oil, nearly as rare these days than hens' teeth (unless you sport a Cairn Energy pass).

Shell has made six "significant finds" since the start of last year and they might have been involved in more had it not, famously, sold for a pittance its stake in the fruitful Mangala field in India to Cairn.  

Still, Shell, bolstered by a growing portfolio of prospecting land, is targeting between 15 and 20 big cat wells a year, and is to direct nearly $1.5 billon (£840 million) a year at finding them. By comparison, Cairn's total spending in the first half of 2004 amounted to £63 million.

With Shell spending the equivalent of $1.20 barrel over the last 20 months to make its big finds, it takes but a few big cats to, er, put a tiger in an oil giant's tank. The chief alternative means of underpinning production, such as relying on smaller discoveries or squeezing extra drops out of existing wells, are more expensive.

Then there are the drives to turn the alternative oil reserves, such as tar sands, into usable petroleum products. Production costs of the tar sand facility Shell opened last year in Canada - which could through oil shale boast bigger reserves than Iraq - were estimated at $12 a barrel.

Yet with oil prices remaining above $40 a barrel, such projects begin to become truly profitable rather than merely viable.

Indeed, Shell's great lucky break was that its annus horribilis has coincided with the strongest oil market for more than 20 years. Thanks to soaring revenues, Shell's problems appear relative rather than absolute – the company is typically compared with BP rather than Enron, which succumbed to its, more severe, accounting difficulties. Shell can underwrite $15 billion a year in capital spending merely through continuing a disposals programme and, perhaps, reducing its share buy-back programme. A dividend cut will not be needed.

And if the company's breakeven point rises to the equivalent of $25 a barrel of oil from $20 a barrel, hey, who's counting when the market price is so much higher?

Such numbers will indeed be totted up if the price of crude collapses, an event a terror atrocity could, ironically, provoke through its impact on global economic growth and, thereby, demand for oil. Industry estimates any major oil strike tomorrow will take until 2007 to be on-stream fully as a source of commercial crude.

Still Shell, while more vulnerable than its major competitors, has this morning revealed a credible revival strategy, a means of turning a stroke of Fortune into prolonged profitability.

Provided, of course, it hits upon those large wells. And realises this time that big cats can be found aplenty even in countries where tigers are endangered.