Guy Chazan must have inwardly rejoiced while interviewing outgoing Shell CEO Peter Voser for his piece in the Financial Times (which I’d link to, but they have a frustrating paywall situation). Most of the interview is about dull and important matters like capital expenditure cycles for oil majors, but Voser gave the FT a little gift by saying that the firm’s investment in US shale reserves (both oil and natural gas lumped together, oddly) had been a major regret of his time at the company’s helm.
In an atmosphere of generalized cheerleading about the prospects of the shale oil and unconventional natural gas sectors in North America and the US particularly, any indication that all isn’t absolutely golden for every player is headline-worthy. Enthusiasm about the self-evident promise of natural gas overall is widespread even as companies both large and small have often struggled to profit in a volatile and unpredictable price environment.
But it would be a mistake to read Voser’s personal regrets or Shell’s recent sale of shale assets in the Eagle Ford in Texas as the “beginning of the end” or the “bursting of a bubble” for North American unconventional oil and gas production.
As someone who’s been closely watching the company form and reform itself for a couple of decades, here are some of the things Shell’s sale and Voser’s comments could mean:
1) The assets aren’t all that was promised. This is the scariest scenario, in which the reserves themselves are not as high-quality, not as productive, not as efficient as are supposed – and that those caveats should now be applied to existing and future assets held by other companies in other plays. This is self-evidently unwise to assume, and as I’ve mentioned before, unless you come to believe that companies and geologists are just deluded or lying (hard to do), the natural discrepancy between forecasts and outcomes for individual projects doesn’t undermine the prospects of the overall sector.
2) Large corporations can’t run shale assets, which are often spread out and inaccessible in a way that doesn’t play to the strengths of scale an international oil company can best deploy. While that generalization has been proven demonstrably untrue as many big companies have succeeded in the unconventional plays, it has a ring of truth about it. Big companies like big projects, especially ones where they can control access and distribution. The fact that Shell is doubling down on the ultimate “island” projects – huge floating gas platforms – is a perfect illustration of a massive company building itself a world where it can better control externalities. It is worth considering if a partnership model or one that allows for innovation in business approaches might better suit unconventional plays.
3) Shell’s corporate politics ate the Eagle Ford play. Shell used to be widely known in the business for a kind of fiefdom model, whereby the individual units had broad remits to operate their investments how they liked. The dual-headquarters split between London and the Hague only underpinned that. The firm has been steadily but progressively moving more and more of its decision-making back to Holland, and the sense that it is uncomfortable with projects the central command doesn’t understand has spread. With the throne in transition, projects supported by the wrong corporate courtier at the wrong time can get jettisoned or downplayed without a lot of logic – the speed with which Voser turned on the promise of unconventionals in North America (only a few months ago he was all for them) has the whiff of internal politics.
Of course, none of these things are probably “the truth” when it comes to Shell, unconventional oil and gas, or any energy project or transaction. But with the energy mix in transition and unconventionals playing a burgeoning role in everything from economic planning to geopolitics, every hint of a problem with the consensus forecast is worth noting both for its impact and for the way it plays out in the public debate.
October 7, 2013 via petergardett.com
Peter Gardett, Founding Editor, Breaking Energy, has spent over a decade covering all areas of the energy industry including coal, electricity and renewable fuels. He specializes in building and leading teams originating new content-led strategies and products for businesses using quantifiable and results-oriented practices, with a particular focus on energy sector finance, trading, policy and regulation.
