Royal Dutch Shell took the headlines earlier this year when the news broke that the Anglo-Dutch oil colossus had fronted £47bn in cash and shares to scoop up British rival BG Group. With speculation that the two would tie up their businesses dating back to the last century, the announcement came as a surprise to few. However, the scale and timing of the deal is significant enough to disrupt a global energy sector yet to come to terms with a new low-price environment.
Once completed, the acquisition will lighten the load on two firms for whom profits, as well as new and significant findings, have proven increasingly hard to come by. It will go some way towards sheltering the company from industry headwinds. “The result will be a more competitive, stronger company”, said Shell Chairman Jorma Ollila in a statement, with CEO Ben van Beurden later adding: “Bold, strategic moves shape our industry.” Bold is right, for any company, though particularly so for one that has struggled to compete in an industry blighted by falling oil prices, fading opportunities and shrinking margins.
Merger fervour
Shell’s net profit in last year’s fourth quarter, for example, was 57 percent short of that for the same period in 2013. What’s more, cuts to personnel and to capital investment plans have hurt the company’s image no end. Here, the accusation runs, Shell has failed to make good on its prior commitments. However, a second look at the new company agenda, set out early in 2014, shows that the oil giant, while not necessarily thriving, is on track to survive the storm.
Patchy record
$330m: In 2002, Shell bought out UK exploration firm Enterprise Oil for $5m, aiming to add new findings to its roster. However, subsequent exploration efforts met with failure, at a cost of around $330m
$2bnIn 2010, looking to expand shale operations, Shell purchased US firm East Resources for $4.7bn, before taking a U-turn to scale down shale work. This resulted in a $2bn write-down of Shell’s North American interests
“We are taking a prudent approach here and we must be careful not to overreact to the recent fall in oil prices”, said van Beurden in a recent earnings release. “Shell is taking structured decisions to balance growth and returns.” And by choosing to fork out £47bn for BG, Shell need not necessarily commit to needless exploration and extraction opportunities with little profit to be made.
In a period where industry names, both big and small, are struggling to make good on known reserves, Shell has opted to link up with a close rival to expand its share of the pie. With a crude price around 50 percent of last year’s high, oil and gas companies can ill afford to stand idly by. The Shell-BG merger could well herald a bullish period for deal-making in the global energy sector.
Owing largely to an enduring low-price environment and rising extraction costs, the situation could soon mirror the late 1990s, when a supply glut of much the same magnitude spawned a wave of megamergers. However, were this scenario to materialise, it would be rather different, in that Shell would be the first to link up with a rival firm, as opposed to in the late 1990s, when a complex shareholder structure prevented the company from crashing the party. Now, with BG on board, the Anglo-Dutch oil giant is an entirely different animal. Under the watch of van Beurden, the company may have happened upon the ideal means by which to negotiate the current climate.
Marking the first megamerger of 2015 and, arguably, the energy sector’s most important acquisition for more than a decade, the Shell-BG deal could well prove to be the catalyst for a wave of energy mergers. With many more in the sector forecast to follow suit, albeit not nearly to the same degree, energy companies will be looking for any opportunity that might bolster their defences. With the larger names in the business having fared a lot better in the current price slump, due to their strong balance sheets and diversified portfolios, the incentives for bulking up have never been greater for smaller firms, particularly those based in Europe.
Whether the deal is successful or not, however, remains to be seen. It is on this, above all else, that van Beurden will be judged come the end of his tenure. The biggest energy deal since ExxonMobil in 1998 will make or break his career, and could mark the beginning of a new era for Shell.
Right van for the job
Having taken the helm as recently as January last year, van Beurden is yet to build his legacy as Shell CEO, though the first 18 months on the job indicate that he’s unafraid of making game-changing decisions. Appointed on the strength of his performances as downstream director and in a string of technical and commercial positions since joining in 1983, the appointment was well received, though largely unexpected.
When the appointment was made public, around the middle of 2014, those outside of Shell circles were surprised, given that van Beurden failed, by most accounts, to make the shortlist of potential successors. CFO Simon Henry, rather, was the red-hot favourite to take the reins, alongside head of exploration and production Marvin Odum and projects and technology director Matthias Bichsel. Still, van Beurden, who is credited with reviving Shell’s lumbering chemicals division and renowned for a rather more calm and collected approach than his predecessor, has been warmly welcomed by shareholders and analysts, who each see him as a good fit for the role.
In spite of his relatively quick and quiet accession to the CEO role, the company veteran did not shy away from making good on some 19 years of speculation and tying the knot with BG. Now that he has done so, unacquainted observers are keeping a close eye on van Beurden’s next move, as they look to decide whether the Dutchman is equipped to lead Shell through what remains a difficult period for the industry.
Beginning with Shell in 1983 after graduating in chemical engineering, van Beurden’s career has spanned both upstream and downstream activities, and his experience of the company’s dealings is extensive. Add to that a number of operational and commercial roles, including close to 10 years spent in the LNG business, and the choice of van Beurden is one that makes sense, and is very much in keeping with the direction the company is taking.
With the major players struggling to arrive at an appropriate means of extracting the world’s remaining oil and gas reserves, van Beurden’s reputation as an experienced and committed Shell employee bodes well for those hoping for a great deal more stability moving forwards. By keeping van Beurden at the helm long-term, the board is hoping to arrest concerns pertaining to security for a company that has changed CEOs four times in the last 12 years.
The very limited framework in which oil companies are forced to work today means that we’re unlikely to see a string of revolutionary changes made to Shell’s business. Rather, van Beurden’s task will be to make cuts where necessary and keep close tabs on an ever-changing energy market, all the while ensuring that any emerging opportunities are pounced upon. For the time being, however, the Dutchman’s focus will fall on limiting exposure to high-cost, low-return projects, and on reducing the chance that Shell, as with any other company in the industry, does not become economically stranded in the prevailing low-price environment.
This is not to say, however, that there won’t be losses. A key part of van Beurden’s role at the company will be to reassure all parties that any setbacks – indeed, there will be many – are not due to poor management or oversight. Taking to the stage less than a month into the job, van Beurden assured investors that the profit warning Shell issued only two weeks before the BG deal was due to circumstances outside of the company’s control, and that measures were being taken to arrest the slide. Arctic exploration was called to a halt, as were plans to expand the company’s LNG portfolio.
Convinced by the notion that Shell was sufficiently equipped to manage a turnaround, investors quickly warmed to van Beurden. The Dutchman has gone on to articulate the reasoning behind the company’s latest losses with consummate ease. With the global energy powers of old having taken a hit, courtesy of the low-price environment, it’s up to van Beurden to ensure Shell continues to serve a vital purpose in the global economy.
Sustainability struggles
“Oil is an essential part of the energy mix. And energy, in turn, is the lifeblood of human existence. Without energy, our lives would be almost unrecognisable”, said van Beurden at an International Petroleum Week event earlier this year. Acknowledging that maintaining a steady and reliable stream of oil is imperative for the lives of countless individuals around the world, the executive took pains to stress that there would be far more than profitability at stake were Shell not to deliver on its ambitions.
“I’m well aware that the industry’s credibility is an issue. Stereotypes that fail to see the benefits our industry brings to the world are shortsighted. But we must also take a critical look at ourselves.” These comments came on the subject of sustainability, and on the tangible and mounting pressure on energy companies to embrace renewables in place of fossil fuels. In no way a fixture of the renewables market, nor of a growing movement to turn away from fossil fuels, Shell has nonetheless taken some steps towards a lower-carbon, higher-energy future.
The BG takeover, for example, promises to tack another 25 percent onto Shell’s proven oil and gas reserves, and boost hydrocarbon production by some 20 percent. In doing so, Shell’s competencies in deepwater oil and LNG will grow quite significantly. What is also clear from the acquisition is that Shell is betting big on both energy sources, believing that, by 2020, the two will account for some $15-20bn in cash flow and a significant share of global supply.
Independently, both companies were major and growing players in the LNG trade, so Shell and BG together lay claim to a strong portfolio of assets. Once the deal is completed, the combined entity will be on course to produce 45 million tonnes of LNG before the end of 2018, and could conceivably hold 20 percent of total production by that time – twice that of major rival ExxonMobil.
“BG will accelerate Shell’s financial growth strategy, particularly in deep water and liquefied natural gas, two of Shell’s growth priorities and areas where the company is already one of the industry leaders”, said van Beurden of the deal. “Furthermore, the addition of BG’s competitive natural gas positions makes strategic sense, ahead of the long-term growth in demand we see for this cleaner-burning fuel.”
The transportation of gas via pipelines is a costly endeavour, though by cooling the gas to liquid, major names like Shell have been able to ship it both safely and efficiently to those short of supply. Responsible for far fewer greenhouse gas emissions than rival fossil fuels, many believe LNG could soon become the go-to energy source for energy-intensive nations seeking a cleaner alternative to either oil or coal. This is already the case in Japan, South Korea and China. Many more countries, particularly in Asia, which currently accounts for some three quarters of global LNG demand, are soon to begin building receiving terminals to satisfy soaring demand.
In choosing to buy up BG, Shell is committing to the idea that fast-growing economies in Asia and Europe will move towards LNG. Add into the mix widespread predictions that the global LNG trade will increase threefold by 2040, and the basis for Shell’s recent purchase appears sound. However, this line of thinking is not without its share of uncertainties, and the mere fact that prices are determined largely by long-term contracts tied to oil is enough to shake confidence in the notion of LNG as an assured investment.
Hello, goodbye
Helge Lund, CEO of BG Group, will no doubt receive some of the credit, should Shell’s takeover prove a prudent move. However, he will perhaps be even more delighted with his financial rewards. Lund was awarded shares worth around £10.6m as a ‘golden hello’ when he joined BG. As these were performance-based, it is unlikely he’ll be able to claim it all, but a sizeable portion will be available to him. He was also given another £750,000-worth of BG shares to compensate his lost shares from Statoil, his previous employer. Furthermore, BG granted him a £480,000 relocation allowance for moving from Norway, plus £450,000 in lieu of a pension. Finally, he will claim over half his annual salary of £1.5m, leaving him with a potential total of over £13m – not bad for a man who was, until a few months ago, considering moving into politics.
The resource is lauded as a favourable alternative to coal and oil, yet a string of recent studies show that LNG projects are failing to materialise in today’s low-price market. Those building the infrastructure required to facilitate LNG demand are often the same companies that have been hit hardest by the oil price crunch. Today, those who committed previously to huge LNG projects are switching, increasingly, to micro plants, in the hope that they might cash-in on rising demand while also reducing their exposure to price fluctuations.
A tight spot
Uncertainties on price and an unwillingness to commit to significant investments in LNG mean that adoption has fallen some way short of expectations, and volatility has succeeded only in compounding the issues stifling the industry. Already, van Beurden has halted a number of LNG projects, with many of them made unviable by the changed energy climate.
On the one hand, the CEO’s experience in the field points to a long and lasting relationship with LNG. However, on the other hand, van Beurden’s connections mean that he is also acutely aware of the risks it poses to Shell’s bottom line. By drawing on his experience and keeping to the agenda set out in the early part of 2014, Shell’s strategy for the immediate future is to maintain a steady stream of production and to not overextend itself in what remains an unstable climate. True, bold and strategic moves shape the industry, but a misplaced step in the current landscape could spell disaster for a company that has, in recent months, failed to make good on its ambitions.
Though boosted by a smooth-talking CEO and a milestone acquisition, Shell’s recent performance is still some way off its better days. Certainly, BG’s portfolio will shield the company from the costs that come with deepwater oil and LNG exploration, though the longevity of Shell’s commitments rests, in great part, on rising demand for oil and gas. Van Beurden’s comments on sustainability, therefore, are perhaps the most revealing ones made in his time as CEO, and only by building up the industry’s credibility will Shell find continued prosperity.