At its annual Investor Day in London, Shell (NYSE: RDS.A) (NYSE: RDS.B) will highlight progress on its strategic plan to deliver profitable growth for shareholders.
Rapid economic development in non-OECD countries is driving sustained, and long term demand growth for all forms of energy. Regulatory and political uncertainties are adding to price and cost volatility in this long term trend.
In this era of 'volatile transitions', Shell is in the midst of an ambitious phase of new growth investment, developing new sources of energy. Shell's activities provide low cost, safe and reliable energy supplies for our customers, world-wide.
Shell's three-year strategic plan, outlined a year ago, is building the foundations for profitable growth for shareholders in the future. We are improving near-term competitive performance, and delivering a new wave of production growth.
For the next wave of growth, to 2020 we have over 30 new projects on the drawing board which will generate new options for the medium term, for the integrated energy company of the future.
Chief Executive Officer Peter Voser commented. "We have made good progress in 2010. Our profitability is improving, and we are on track for our growth targets. There is more to come from Shell."
Shell is on track to deliver its strategic targets by 2012, namely for a 50-80% increase in cashflow from operations 2009-2012, in $60-$80 oil price and improved Downstream and natural gas environment. These targets were defined in early 2010 against the context of the global economic downturn, in order to generate surplus cashflow for shareholders through-cycle. The targets are underpinned by one of the most substantial portfolios of new oil & gas projects in our industry today.
In the first year of delivery against this three year strategic plan - 2010 - Shell saw some $10 billion, or 40% improvement in operating cashflow to $33 billion, lower costs, higher oil & gas production, and continued progress with Downstream restructuring. This was a strong all-round performance in 2010.
Key points from Shell's annual strategy update
Cost reduction and operating efficiency are a key part of Shell's business, to ensure profitability for our shareholders and competitive energy prices for our customers. As a result of Shell's actions, underlying costs fell by $2 billion in 2010, with further scope for multi-billion dollar underlying cost reductions in 2011-12 through continuous improvement programmes.
Shell continues to sell non-core positions to enhance capital efficiency, and as part of funding for future investment. Asset sales proceeds have exceeded $30 billion in the last five years, and are expected to be up to $5 billion in 2011.
Downstream remains an important business for Shell, generating over $21 billion of free cashflow in the last five years, from a leading global portfolio. The company is redoubling its efforts to improve returns in Downstream. The bulk of the 2010-12 asset sales programme in Downstream has been completed, with transactions since end-2009 reducing refining capacity by over 700,000 b/d, reducing our marketing footprint, and generating $4.7 billion of disposals proceeds, including the recently-announced disposal plans for UK refining and Africa marketing.
Programmes to streamline the global Downstream organization continue, with more than $2.5 billion of cost take out in 2009 and 2010, and a new target for a further $1 billion Downstream cost reduction for 2011-12 announced today. This, combined with the benefits of improved operating performance and selective growth should deliver attractive returns across the cycle.
New wave of production growth
As a result of its sustained growth investment, Shell has delivered an organic Reserve Replacement Ratio of 133% for 2010, and a total proved reserves to production ratio of 11.5 years (for further information see Reserves Supplement).
New Upstream start-ups increased Shell's 2010 resources on stream to 10 billion boe, a headline increase of 1 billion boe, in a portfolio that produced some 1.2 billion boe in 2010. New investment decisions, such as Mars B in the Gulf of Mexico, maintained Shell's resources base for new projects under construction at 11 billion. The company has 20 new upstream projects under construction, which will add over 800,000 boe/d, driving the target for 3.5 million boe/d of production for 2012, a 6% increase compared to 2010.
Shell has today set a new target for 3.7 million boe/d of production for 2014, an increase of some 12% from 2010 levels, amongst the highest growth rates in our sector.
Maturing next generation of project options
2010 exploration & appraisal activity added some 2.3 billion boe of new resources, at a competitive cost of less than $2/boe. Discoveries in the Gulf of Mexico and Australia, and successful wells in North America tight gas underpin this 2010 performance.
In 2010, acquisitions and business development added further potential resources, in the US Marcellus tight gas and Eagle Ford liquids-rich shale gas, Iraq oil, and Australia coal bed methane.
Shell has negotiated agreements with three National Oil Companies in 2010 - in China, Qatar and Saudi Arabia - covering new natural gas potential, and continuing Shell's long history of partnering with National Oil Companies.
Shell believes that its current Upstream portfolio can support growth to 2020, with studies underway on over 10 billion boe of resources, an increase of some 2 billion boe from 2009 levels. Shell is assessing over 30 new projects with production potential of over 1 million boe/d, and maturing further options, spanning activities in tight gas, deep water, LNG and traditional resources, in a world-wide, and industry-leading portfolio.
Shell expects over $100 billion of net capital investment for 2011-14, some $25-$27 billion per year, in line with previous guidance, to underpin the Upstream growth profile, and Shell's Downstream strategy.
2011 has started well, with the start up of new LNG at Qatargas 4, and the restart of refinery catalytic crackers at the Port Arthur at end-2010 and at Pernis in February 2011. These projects, combined with the expected 2011 start-up of Pearl gas-to-liquids in Qatar, and new oil sands upgrading capacity in Canada, underpin Shell's production and financial growth targets for 2012.
Shell continues to mature new options for future growth investment, with plans to drill 25 high potential exploration wells in 2011. The company is planning to take final investment decision on some 10 new projects in 2011-12, including Prelude Floating LNG in Australia, debottlenecking of the AOSP project in Canada oil sands, and deep water oil & gas developments at the Cardamon discovery in the Gulf of Mexico and at Malikai in Malaysia.
Supplement: Reserves update
On an SEC basis, Shell in 2010 added 1,370 million boe of proved oil and gas reserves before production, of which 1,197 million boe comes from Shell subsidiaries and 173 million boe is associated with the Shell share of equity accounted investments. With 2010 production of 1,242 million boe, our headline Reserves Replacement Ratio was 110%. Organic Reserves Replacement Ratio, which excludes the impact of oil price movements in the year, acquisitions and divestments, was 133%.
Reserves additions in 2010 include 113 million boe in additions from new fields in North America, Asia, Europe, Africa and Oceania. Proved reserves additions were made across the global Shell portfolio.
At end 2010, net proved reserves attributable to Shell shareholders were 14,249 million boe, an increase of 117 million boe from end-2009, after taking into account 2010 production. As a consequence, Shell's reserves to production ratio was 11.5 years at the end of 2010.