The Independent: Shell ups the ante on capital spending: “There is a big black cloud hanging over Shell's headquarters on London's South Bank and it does not come from the Bunceford oil depot.”: Wednesday 14 December 2005
There is a big black cloud hanging over Shell's headquarters on London's South Bank and it does not come from the Bunceford oil depot. Rather, its origins lie in the company's abysmal reserves replacement ratio, which is as good a proxy as any for an oil company's future value. Last year Shell replaced fewer than one in five of the barrels it pumped from the ground with new discoveries. This year the figure will be better but Shell will have to dig a lot, lot deeper to get back above 100 per cent, the level that all self-respecting oil majors aim for.
Jeroen van der Veer, the new man in charge of the new-look Shell, has made a start by raising next year's capital expenditure budget by a quarter to $19bn. Admittedly, a chunk of that is accounted for by price inflation and development or redevelopment of existing fields. But more than half of the increase in upstream investment will be dedicated to new exploration projects.
Even then, Shell might not be spending enough. In an era of rising oil demand and sky-high oil prices, it will still only sink the drill bit if a project can wash its face at $25 a barrel. BP uses the same benchmark for its investment decisions.
The oil majors have thus far shown remarkable constraint in their investment spending, resisting the follies of past cycles where any uplift in the oil price would cause them to let rip on development thus exaggerating the scale of the subsequent downturn. Out of necessity, these capital disciplines may be starting to crack.
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