Shell posts 6% oil output growth in Q4, as earnings suffer

London — Shell's upstream oil production increased by 6% on the year to 1.77 million b/d in the fourth quarter of 2019, contributing to what CEO Ben van Beurden insisted is a "very strong upstream business," even as profits plummeted on the back of low commodity prices and financial impairments.

Shell's oil output was boosted by new developments ramping up in Brazil, the US Permian basin and the US Gulf of Mexico, although a 9% reduction in its upstream gas output resulted in flat overall production, of 2.81 million b/d of oil equivalent.

Van Beurden said further production growth was expected from Shell's newly producing Appomattox oil field in the Gulf of Mexico, which came on stream last May. The facility is producing 75,000 b/d from four wells, with another 14 to come on stream, he said, adding that Shell was also ramping up at its liquids-rich Permian assets in the US.

Chief Financial Officer Jessica Uhl highlighted Shell's rising Brazilian production, including the latest floating production facility to come on line, in the Berbigao-Surura area, describing Brazil as an upstream "heartland," with 16 such floating facilities now producing 400,000 boe/d for the company.

Shell's upstream division, however, plunged to a $787 million loss in the quarter, on the back of weak prices, decommissioning costs and a $1.65 billion impairment in the value of its US unconventional assets, notably its Marcellus and Utica shale production in Pennsylvania. Van Beurden added that part of the conventional business -- not including deepwater or shale -- continued to experience "challenges."

The company's overall fourth-quarter profit was down 88% on the year at $871 million. Excluding "identified items" -- mainly impairments -- Shell's profit was down 48% at $2.9 billion.

"Frankly speaking, all macro-economic indicators are working against us," Van Beurden said in a call with journalists. However, he went on to describe 2019 as "a year of progress" and said Shell would continue to sustain upstream investment at around $11 billion-13 billion annually.

"We have further work to do and to an extent we are also dealing with some very negative market dynamics, but only to an extent. We have done and will continue to do all we can to ensure that Shell is resilient no matter what the macro climate is," he said, adding that Shell would maintain a "relentless drive to high-grade our portfolio."

Overall capital expenditure this year would be at the low end of a $24 billion-29 billion range, but even the bottom of that range would be $4 billion more than needed to ensure growth, Van Beurden said.

Shell signalled it would be going slow on share buy-backs, while a $20 billion two-year divestment program begun at the start of last year would continue, with half of the target already achieved. There would be no rush to sell based on a need for "early cash," Van Beurden said.

On the issue of resilience, he said the average breakeven oil price for projects approved by Shell for development last year was under $30/b, and noted a desire to increase investment in electricity projects.

"We want to prioritise a disproportionate amount of our investments to where we see the energy system transitioning, so in other words more in LNG -- particularly more in markets -- more in marketing, more in petrochemicals and increasingly also more and more in power," he said.

Integrated gas strength

Shell's LNG business, or "integrated gas" division, and its downstream division held up better than the upstream business in the fourth quarter. Uhl said the full-year results reflected a "balanced" portfolio, in which integrated gas had proved "resilient in a volatile market."

Gas production and liquefaction in the integrated gas division both increased by 3% and 5%, respectively, thanks to projects ramping up in Australia and Trinidad & Tobago, as well as additional capacity at the Prelude offshore LNG facility in Australia and the Elba LNG facility in the US. Gas output in the division was 4.58 Bcf/d and liquefaction volumes in the quarter reached 9.21 million mt. Van Beurden said once Prelude had reached "steady-state" operations it would offload a carrier a week of LNG, condensate or LPG.

In the refining division, Shell said crude trading and optimisation had made a lower contribution, offset by a stronger contribution from trading in oil products, mainly fuel oil.

In the current quarter, Shell said it expects lower upstream production than in Q4 2019, with oil and gas output in a range of 2.63 million-2.78 million boe/d, and production from the integrated gas division flat or higher, at 950,000-980,000 boe/d. It said liquefaction volumes would also be higher, at 9 million-9.5 million mt.

Shell also estimated on a preliminary basis that its 2019 reserves replacement ratio would be 65%.

Van Beurden also noted a worsening of the company's personal safety record, with seven work-related fatalities last year at Shell-operated facilities.