Shell Bets on Quick Production Boost From Oil-Rich Shale

HOUSTON - Royal Dutch Shell PLC has made its name in the U.S. as a big oil and gas producer in the Gulf of Mexico. But in less than five years, oil from shale could play a role that's almost as important for the Anglo-Dutch oil company's North American output.

Since the beginning of last decade, Shell has been acquiring unconventional oil and gas acreage, an effort that it stepped up in 2008 with investments in British Columbia and in 2010 with strategic buys in south Texas's Eagle Ford Shale and in the prolific Marcellus Shale in the U.S. Northeast. But its prowess is speeding up with the acquisition, announced Wednesday, of $1.94 billion worth of Chesapeake Energy land in West Texas' Permian Basin.

The Chesapeake land currently produces 26,000 barrels of oil equivalent a day. Once the transaction closes next month, the land will more than triple Shell's current global production from so-called oil-rich shale--shale formations that are richer in crude oil and natural gas liquids than in dry natural gas. Development there, as well as in acreage the company holds in British Columbia, in Kansas' Mississippi Lime, the Eagle Ford, and others, will help the company meet its ambitious goal of producing 250,000 barrels of oil equivalent worldwide from oil-rich shale by 2017, says Russ Ford, Shell's Executive Vice President for Onshore Operations in the Americas. That's about 6% of its projected total global production that year.

Shell said that a "fair amount" of that shale bounty will come from the U.S., where Shell currently produces about 381,000 barrels of oil equivalent, including 185,000 barrels of oil equivalent a day from the U.S. Gulf.

The rapid ramp-up expected by Shell underscores how quickly the development in the past decade of shale oil and gas resources has changed the production outlook for the world's largest oil companies. Until recently, oil giants like Shell, Chevron Corp. and Exxon Mobil Corp. battled stagnation, as many oil-rich countries closed access to the easy oil. They had to plunge into hard-to-reach frontiers, such as deep-water oil and gas, investing billions in risky projects that sometimes took a decade to complete. Now shale production, especially in North America's investor-friendly oilpatch, makes quick production ramp-ups possible. "The turnaround onshore is much different than what you get in an offshore environment," Mr. Ford said in an interview.

Jason Gammel, an analyst with Macquarie, said that Shell's plans are "achievable, based on the acreage position they've put together."

The attraction of shale for big, deep-pocketed oil companies is that "If you want to throw a lot of capital at it, you can achieve a lot of growth in a short amount of time," Mr. Gammel said.

Shell's intensive spending to secure future production, however, could mean dashing some investors' hopes that the company could increase its fairly generous dividend in the short-term. The Chesapeake deal, which will add $2 billion to Shell's already robust $32 billion 2012 capital spending program, shows that "the checkbook is out," said Investec's Stuart Joyner. "It's probably part of a growing acquisition trend that will cap the dividend," he added.

Shell plans to spend about $6 billion in shale operations around the world in 2012, more than half of which will go to its North American portfolio. In the U.S. and Canada, the company counts about 3 million acres in oil-rich shale formations, including the acreage gained in the Chesapeake deal.

In the U.S., Shell's shale acreage is located in Texas, Ohio, Pennsylvania, Wyoming, Kansas, Colorado and California. The company is also drilling in oil-rich shale in Egypt and Oman, and aims to drill in similar plays in Turkey and Russia in the future, spokeswoman Kelly Op De Weegh said.

Shell is one of the European oil companies to have most heavily invested in U.S. shale gas. Others include Norway's Statoil ASA and France's Total S.A.


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