Shell Runs Into a Double Whammy (RDS.A/B)

Royal Dutch Shell (NYSE:RDS.A/B) has been hit with two issues at once.  While neither is going to bust the company, multiple problems hitting at once is a bad omen.  The oil and gas giant’s Shell India subsidiary is having trouble selling a cargo of LNG. According to Platt’s, Shell’s storage facility in India is full and there are no takers for a cargo that has been on-board a ship for more than 30 days.  To add fuel to the fire, one of the company’s big bets in Alaska has so far been nothing more than a bust.

The culprit is fuel-switching. LNG is being offered for about$18/million BTUs, more than twice the price of naphtha (think Sterno),which is currently selling for about $8/million BTUs. Even natural gasliquids (NGLs) are selling for about $10/million BTUs. Shell has beencounting on the inability of customers to switch to lower cost fuels.Shell was wrong.

The outlook is not much better. A division of India’s RelianceIndustries is expected to be supplying natural gas to from a localsource early next year.

LNG suppliers could be in trouble all over the globe soon. As naturalgas prices fall, and supplies increase, LNG just can’t compete. Thesituation bears watching.

On another note, the company shelled out $2.1 billion for rights to drill off the northwest coast of Alaska in the Chukchi Sea, and right now, the company has nothing to show for it. The Ninth Circuit Court of Appeals on Friday halted Shell’s exploration program with a ruling that the federal government had failed to consider properly environmental impacts from the drilling.

This will be widely seen as a setback for Shell, but it’s unlikely that the company will fight too hard right away. With crude prices below $50/b, pumping crude out of one of the harshest environments in the world is a money-loser. It’s true that by the time that Shell is actually producing crude in quantity (say six years or so), oil prices could be back to $150/b or more. And it’s also true that federal agency estimates point to 26.6 billion barrels of oil and 132 trillion cubic feet of gas along Alaska’s outer continental shelf. Still, Shell might be breathing a sigh of relief at being able to put the exploration on hold for a while and keeping its cash in its pocket.

Paul Ausick
November 24, 2008