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Shell flags shrinking oil, gas reserves life in energy transition document for shareholders

Highlights

Two-thirds of proved reserves to be produced by 2040

Comes amid rising concerns over future asset write-offs

Shell expects oil production to slide by 1-2% in coming years

London — Shell expects to have produced about two-thirds of its existing oil and gas reserves over the next two decades, the company said April 15, highlighting its falling exposure to future oil prices as the major shifts focus to renewable energy and electricity supplies.

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Based on 2020 year-end figures, around 75% of Shell's proved oil and gas reserves will be produced by 2030, with another 3% after 2040, the company said in an Energy Transition document to be presented to its shareholders. Including probable reserves, also known as 2P, Shell said around 70% of its proved plus probable reserves will be produced by 2030, and 5% after 2040.

Investor concerns over stranded assets accelerated last year after oil majors slashed their long-term price assumptions for oil and gas to reflect expectations that the pandemic will accelerate the shift away from fossil fuels. The move sparked concern over a wider industry recognition of the potential for large-scale asset writedowns as the energy transition hits the long-term value of oil and gas.

Last year, Shell replaced only 65% of its production with new reserves due to a "triple whammy" of a collapse in the value of its recoverable reserves, asset sales and a dearth of investment decisions on new upstream projects. By year-end, Shell's proved reserves had decreased by 1.97 billion barrels of oil equivalent to 9.12 million boe, putting its reserves life at just seven years, well below the industry average of around 10-12 years.

Speaking earlier this year, however, CEO Ben van Beurden said the 2020 result could be seen as a "one-off", noting that the company intends to "look after" its upstream business so that it remains "a very strong cash-generative business."

Indeed, further upstream exploration for oil and gas in the coming years will continue to find new reserves, albeit at a slower pace, likely extending Shell's reserve life horizon over the coming decades.

Peak production

Reserves life, and the related reserves replacement ratio, have been a touchstone of operating performance measures for oil majors since the birth of the global oil industry.

But many integrated oil companies have struggled to continue building their proved reserves in recent years as fewer giant oil discoveries are made and competition from national oil companies heats up.

Last month, BP dropped its reserves replacement ratio as one of the company's key performance metrics, also underscoring the company's ambitious plans to become an integrated energy player by targeting renewable and low-carbon energy investments.

Shell, Europe's largest oil and gas company, in February conceded that its oil production has peaked in 2019, noting that further declines in oil output would result from asset sales and natural field declines.

Shell has said it expects its oil production to decline by 1%-2% annually over the coming years, as it limits upstream investment to focus more on transition areas such as its LNG business and renewables.

One of the first international oil and gas companies to set targets for reducing the net carbon footprint of its energy products, Shell's Energy Transition Strategy sets out the company's target to achieve net-zero emissions by 2050.

The company is planning to ask its shareholders to support the energy transition strategy next month at its annual general meeting, marking the first time an oil major has presented its transition plans to shareholders. (See story at 08:14 GMT)