Shell profits plunge on Arctic drilling retreat and Canadian write-offs

Oil company reveals quarterly loss of $7.4bn but refining and marketing business provide strength for cash flow

Shell has revealed the $8bn (£5.2bn) cost of scrapping Arctic drilling, abandoning a huge Canadian tar sands project and preparing itself for continued low oil prices.

The charges, which sent the company to a quarterly loss of $7.4bn, included a $2.6bn write-off for withdrawal from the Alaskan Arctic and an additional $2bn charge on the Carmon Creek oil sands project in Canada, where the company suspended building on Tuesday.

It also reflected other impairment charges triggered by the downward revision of the long-term oil and gas price outlook, Shell said. Oil prices have fallen from a peak of more than $115 a barrel last year to less than $49 on Thursday. “In headline terms, this was a challenging quarter,” said Shell’s chief financial officer, Simon Henry.

The costs came as underlying earnings fell by 70% to $1.8bn. The position would have been worse had it not been for a robust performance from the “downstream” refining and marketing business. Lower prices and reduced costs saw earnings here grow to $2.6bn from $1.8bn a year ago.

But the company’s £47bn acquisition of BG Group remains on track for completion early next year. Henry stressed the importance of the takeover. “The deal is a springboard from which we will focus on fewer and more profitable themes, especially deep water and integrated gas,” he said.

It was estimated that the Carmon Creek thermal oil sands project would contribute 80,000 barrels of oil equivalent a day when it was originally sanctioned in October 2013, but it was postponed earlier this year. After a review, Shell concluded that the project no longer justified its position in the group portfolio.

Shell abandoned drilling in Alaska last month after $7bn of spending ended with a well that failed to find hydrocarbons. At the same time, environmental activists argued that industrial activity would hurt fragile ecosystems and marine mammals. They insisted the icy Arctic waters could not be cleaned in the event of a spill.

Henry said: “It was a challenging quarter, but the underlying performance does give us confidence that we will be able to capture the significant value, which is available in the BG combination.”

The dividend is maintained at 47 cents per share and the company suggests the payment to shareholders can be maintained with an oil price of about $60 dollars a barrel.

The refining and marketing business provided strength for Shell’s cash flow. This meant net investments and dividends were covered by operating cash flow over the past year, when oil prices have averaged $60 a barrel. Cash flow from operating activities for the third quarter was $11.2bn. That is a relatively modest reduction when compared with the $12.8bn recorded in the same quarter last year.

Shell’s share price fell by more than 2%, down 36p to 1,706p.

The company was not alone in recording the impact of a lower oil price regime, with Eni of Italy and Total of France reporting profit falls.

The scale of the writedowns surprised some analysts, but they took comfort from the progress Shell was making to balance cash flow with spending and its ability to maintain the dividend.

“Getting out of previous strategic missteps (Alaska, shale, more oil sands) via the impairments is a necessary evil,” said Oswald Clint, an analyst at Sanford C Bernstein in London.


Ian Griffiths

The GuardianTramp

Related Content

Article image
Shell vows to sell $10bn extra assets as profits plunge 87%
Collapse in oil price hammers profits as BG takeover looms but CEO pledges not to conduct a fire sale or cut more jobs

Terry Macalister Energy editor

04, Feb, 2016 @10:43 AM

Article image
Shell warns of 50% cut in profits amid plunging oil price
Annual figures likely to be further hit by up to $7bn in writedowns as takeover deadline for rival BG looms

Terry Macalister

20, Jan, 2016 @8:11 AM

Article image
Shell reports 71% plunge in profits
Anglo-Dutch energy giant says quarterly profits fall to $1.18bn in wake of global slump in oil prices

Julia Kollewe

28, Jul, 2016 @9:09 AM

Article image
Shell agrees to buy BG Group for £47bn
One of the largest takeovers in oil sector for 20 years comes after fall in crude prices, as gas group’s CEO looks set to receive £25m in exit pay deal

Julia Kollewe and Sean Farrell

08, Apr, 2015 @1:21 PM

Article image
Shell to shed further 2,800 jobs after BG takeover
Cuts will affect 3% of global workforce as Anglo-Dutch oil giant seeks to cut costs to cope with oil price slump and rationalise operations after £40bn deal

Sean Farrell

14, Dec, 2015 @12:38 PM

Article image
Shell to close three UK offices housing 1,600 staff
Oil company announces closure of sites including BG’s headquarters in Reading following takeover earlier this year

Nick Fletcher

25, Apr, 2016 @12:56 PM

Article image
Time for Shell boss to master art of renegotiation
While it would be embarrassing for Ben van Beurden to push BG Group for better terms at the 11th hour, embarrassment should not enter the equation

Nils Pratley

14, Dec, 2015 @7:25 PM

Article image
BG and Shell could be just the first of many energy mergers
The halving of the oil price could herald a rash of mergers and acquisitions in the energy sector

Larry Elliott

08, Apr, 2015 @5:31 PM

Article image
Shell shareholders vote for BG Group takeover despite opposition
More than 80% of investors support deal, but Shell chief Ben van Beurden must win BG investors’ backing to complete merger

Terry Macalister Energy editor

27, Jan, 2016 @2:25 PM

Article image
Shell oil drilling in Arctic set to get US government permission
Controversial decision expected from US interior secretary likely to spark protests from campaigners against Anglo-Dutch exploration in seas off Alaska

Terry Macalister

22, Mar, 2015 @5:15 PM