Lloyds List: Shell turns eye of the tiger on hunt for big cats: “Shell's involvement in the controversial Sakhalin II project that has seen a doubling in costs to $20bn for all operations to 2014 is a key part of its strategy to boost LNG output levels. Delays to pipelines and offshore platforms, plus calls for more environmental sensitivities has meant LNG deliveries from the project are delayed by at least six months to 2008.”Tuesday August 16, 2005

Global growth in demand for liquefied natural gas is driving the market leader Royal Dutch Shell to double its production capacity by the end of the decade, while it refocuses its exploration efforts to find the big cats, writes Martyn Wingrove

AFTER completing the unification of the two board of directors and the full merger into Royal Dutch Shell, chief executive Jeroen van der Veer wants is putting the focus back on growth through capital projects and building gas infrastructure.

The Anglo-Dutch oil major continues to be the world leader in producing liquefied natural gas through plants in Asia, Africa and the Middle East, and has its sights on doubling this capacity by the end of the decade to meet booming global demand.

Its strong portfolio of equity in LNG production plants is heads above its nearest rival, and the management hope this remains the case even if capital costs on its latest giant integrated project have doubled.

Shell is also hoping to pump up its upstream business over the next ten years through the drilling of large prospects that could provide the resources needed to drive new projects.

So in a two-pronged attack, Shell is driving to increase its LNG production capacity and search out its 'Big Cat' oil fields in deepwater frontiers.

'In LNG we are extending our lead position and have delivered eight new trains in the past six years so we have more than 11m tonnes per annum in capacity. Our nearest competitor is 20% below this,' said Mr van der Veer.

'We are on track to grow this business to double capacity in the period 2004-2009 and we have identified new projects to improve on our leadership.'

Shell's position in the North West Shelf project in Western Australia in the Nigeria LNG plant and equity in trains around Malaysia, Brunei and Oman are the basis of its existing LNG business.

By building more trains on these plants and building on greenfield sites such as Sakhalin II, Shell has the ability to own a capacity of 20m tpa by 2010.

Shell has a 22% interest in the North West Shelf LNG plant and has another interest through its equity in Australian oil company Woodside Energy.

A fourth train at the plant started this year and the partners agreed to build a fifth train to boost output to 15.9m tpa by 2009, backed by gas projects off the Western Australian coast.

Next year, Shell will see a large rise in LNG production levels when trains 4 and 5 come on-line at the Nigerian Bonny plant and the Qalhat project in Oman starts firing up.

According to partner Total, the fourth Bonny LNG train will come on-line by the end of this quarter and the fifth train by the end of this year.

There is also a sixth train at Bonny in the pipeline as oil companies push ahead with projects to reduce flaring of associated gas at major oil fields in Africa's largest oil producing country.

Shell's involvement in the controversial Sakhalin II project that has seen a doubling in costs to $20bn for all operations to 2014 is a key part of its strategy to boost LNG output levels.

Delays to pipelines and offshore platforms, plus calls for more environmental sensitivities has meant LNG deliveries from the project are delayed by at least six months to 2008.

This is set to be Russia's first LNG export project and will tap key gas markets for the nation with the world's largest natural gas resources.

Shell is also in talks with Russian gas giant Gazprom, which is striving to enter the East Russian gas production market, that will dilute the London-list oil group's interest in the project to under 25%.

Even with all this happening to such a key project, Shell should still meet its own aspiration to double LNG production by the end of the decade unless there is further slippage to the timetable.

Beyond 2010, Shell has its sights on boosting LNG output further by developing new greenfield projects and expanding existing plants to have a capacity of around 35m tpa by 2015.

These will be projects in Shell's key operating regions Australia, Middle East and Nigeria that will drive the growth in its LNG production levels.

Shell is a partner with ExxonMobil and Chevron in the Greater Gorgon project in Western Australia, where front-end engineering and design work has started for a 10m tpa capacity LNG plant involving two trains.

In Nigeria, Shell and its partners in the Bonny LNG plant are considering a seventh and eight train, plus the Anglo-Dutch group is involved in the double train Olokola project.

By 2013, Shell also hopes to have built two trains at the Persia LNG project in Iran that will tap part of the huge South Pars gas complex and it wants to be involved in the QatarGas 4 project in Qatar that will use gas reserves from the massive North field. Shell could also be involved in two more greenfield LNG projects in the next decade, including building a plant in Venezuela and redeveloping a plant in Libya.

Shell's upstream strategy has not mirrored its success in LNG for a long time, but now there is a feeling this has been turned around with new discoveries made this year on frontier deepwater areas.

Its management are hoping to put last year's reserves scandal, where it slashed almost a quarter of its proved reserves, behind them after the unification of Shell Transport ' Trading with Royal Dutch Petroleum.

The cost overruns on Sakhalin II and the heavy delays to Shell's flagship Bonga oil project offshore Nigeria, where a floating production storage and offloading vessel is scheduled to start in the fourth quarter, more than a year late, is a product of the old management.

The new organisation wants to deflect focus from these problematic giant projects by chasing new large oil and gas fields and raising exploration investment.

It has already found oil and gas on five big cat prospects, where the reserves could be more than 100m barrels of oil equivalent net to Shell, this year, and has more to drill in the third and fourth quarters.

'We have changed our exploration strategy and are chasing big cat prospects to find large fields. They have a lower probability of success but are needed for our long-term future,' said Mr van der Veer.

'Already, five out of eight big cat prospects are discoveries so this helps us to increase our total hydrocarbon base, which is five times our proved reserves.'

So far this year, Shell has discovered oil on three big cat prospects offshore Nigeria, plus a large gas-condensate field in the Norwegian Sea and one in Australia.

This month the London-listed group announced two large discoveries in the deepwaters offshore Nigeria. It used Transocean's drillship Deepwater Pathfinder to discover oil and gas on the Etan and Bobo structures, plus one other in the Niger Delta.

The Bobo discovery in oil prospecting licence OPL 322 is the most westerly to date in the deepwaters of Nigeria and could be evidence for a new trend of oil fields. The Etan discovery lies in OPL 245 south of the Nnwa and Doro gas fields.

The big cat discovery in the Norwegian Sea was drilled in the first quarter on the Onyx SW prospect in block 6406'9, 40km west of its Draugen production platform.

The Norwegian Petroleum Directorate estimates reserves in Onyx SW at about 60bn cu m of gas, or 377m barrels of oil equivalent, and it lies in more than 350 m of water.

Shell has planned to drill 15-20 big cat wells globally in 2005 and 2006 in its search for new stand alone oil projects to begin over the next five years.

Each one in deepwaters could require the services of a floating production system with a capacity to produce more than 100,000 barrels of oil equivalent on a daily basis.

'These discoveries are very encouraging and we intend to appraise them this year or 2006,' said Mr van der Veer.

This will require more well drilling to evaluate the size of these discoveries and could lead to more exploratory drilling in the adjacent areas.

Shell has not neglected exploration drilling on smaller prospects close to its existing infrastructure and has been pretty successful in its exploration and appraisal drilling.

'We have drilled 21 E'A wells with a 62% success rate in the first half of this year and have continued to strengthen our acreage position,' said Mr van der Veer.

'We continue to build on this success and have increased exploration expenditure to $1.8bn for 2005 and 2006.'

This year, Shell has also gained new exploration acreage in the Gulf of Mexico, Beaufort Sea, offshore eastern Canada, off Western Australia and in North Africa.

This year it has made other discoveries in Malaysia, the Netherlands, Egypt, UK, Oman and the Gulf of Mexico.

Shell will need to begin investing in these new projects soon to ensure it can meet new production ambitions that will be a key feature of how the unified company performs.

Mr van der Veer expects group production to remain in the 3.5m to 3.8m barrels of oil equivalent per day range, with 2005 output at the lower end of this, rising towards 3.8m boe per day into 2007.

This is a poor second to BP's growth plans and current daily production of 4.1m barrels of oil equivalent, but at least its exploration work is showing positive results.

It will be a tough job to turn Royal Dutch Shell around, but already the progress is positive for Mr van der Veer and his management team.

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