Shell Profit Jumps, But Says Drilling Ban to Hit Output for Years

(Dow Jones Newswires), Oct. 28, 2010

Shell posted a strong increase in third-quarter profit but said the after-effects of the U.S. drilling moratorium will take a toll on the company's production for years to come.

Shell, which is one of the biggest operators in the U.S. Gulf of Mexico, said that next year it expects to pump 40,000 barrels a day less than it had planned before the drilling halt was imposed, representing about 1.3% of its current production. There could also be "further impacts" in 2012, it said.

Shell's remarks on the moratorium came as it announced third-quarter results that easily beat most analysts' forecasts, posting an 88% rise in adjusted profit. The results reflected higher oil and gas prices as well as the benefits of a big efficiency drive.

In a call with reporters, Shell's Chief Financial Officer Simon Henry also said the company had so far taken $115 million in charges this year for drilling rigs idled by the moratorium.

The Obama administration imposed its controversial drilling freeze shortly after the Deepwater Horizon rig blew up in the Gulf of Mexico April 20, killing 11 men and triggering the worst offshore oil spill in U.S. history. It lifted the ban earlier this month.

But few expect a quick resumption of drilling activity, amid lingering uncertainty about the regulatory and legislative framework that will govern the offshore industry in the wake of the spill.

Shell isn't the only big company still affected by the repercussions of the Gulf disaster. Oil services giant Schlumberger said last week that the moratorium had reduced its earnings by as much as 3 cents a share and would likely bring down fourth-quarter earnings by between 4 cents and 5 cents a share.

Oil firms are scrambling to understand how new rules recently announced by the government -- such as increased third-party inspection of crucial equipment like blowout preventers, requirements for expanded spill clean-up plans and greater federal oversight of how wells are drilled and tested -- will affect their business.

The new regulations will likely squeeze smaller independents that currently account for around 60% of U.S. Gulf production. Some predict they will be forced to exit the deepwater Gulf, especially if legislators move ahead with plans to lift the liability cap for oil spills -- with potentially far-reaching consequences for U.S. oil and gas production.

Mr. Henry agreed that some smaller oil firms may "choose not to bear uninsurable risks."

"We do expect some players to be thinking carefully about the risk-reward balance of deepwater drilling and participating in offshore projects," he said.

But as Mr. Henry's comments show, it's not only smaller companies that have been affected by the blowback from the Gulf oil spill. He said the moratorium had affected not only Shell's exploration program, but its plans to drill development wells that would boost production at existing projects, such as the vast Perdido platform in the Gulf.

He said Shell had submitted applications to drill as soon as the freeze was lifted, but these might now take longer to process than the 30 days that were typical before the spill.

The toughening regulatory environment is also affecting Shell's plans to explore for oil and gas in federal waters off northern Alaska. The company estimates that there are 25 billion barrels of oil in the Alaskan Arctic, with most of it in the Chukchi Sea, and in 2008 spent $2.1 billion on leases there. But its drilling program for the Chukchi, and the neighboring Beaufort Sea, were thrown into disarray this year by the drilling moratorium. They had already been badly disrupted by a series of lawsuits from environmental organizations.

Mr. Henry said Shell had not resubmitted its application to drill in the Chukchi Sea next year, though it had done so for the Beaufort Sea. A spokesperson said the company had to wait for the outcome of two legal disputes before it made a decision on the Chukchi.

But the company could have been swayed by the findings of a panel set up by President Barack Obama to review offshore drilling. In a working paper published earlier this month on the challenges of responding to oil spills in the Artic, the panel said the Beaufort had a more developed infrastructure, whereas a spill or blowout in the Chukchi Sea would be "more difficult to access, let alone contain and clean up."

The company said the clean current cost of supplies, a closely-watched figure that strips out gains or losses from inventories and other non-operating items, was $4.93 billion in the three months ended Sept. 30, compared with $2.62 billion in the third quarter of 2009. The company reported a 5% increase in oil and gas production, and a 22% rise in liquefied natural gas sales.

Net profit for the quarter totaled $3.46 billion, up 6.7% from $3.25 billion a year ago.

Copyright (c) 2010 Dow Jones & Company, Inc.


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