Shell to restructure shale assets in U.S.

Royal Dutch Shell's new strategy for the Marcellus Shale is "fix or divest."

The Hague, Netherlands-based energy and chemicals giant announced Thursday it will restructure its oil and gas assets in the U.S. following underwhelming results over the past several years.

In the Marcellus, Shell controls about 900,000 acres and has about 300 employees in Pennsylvania. The company made a major bet on shale gas when it bought Warrendale-based East Resources for $4.7 billion in 2010.

Now Shell is looking to cut spending and staff at its dry gas operations, which include the Marcellus and two other plays in the U.S., by about 30 percent, CEO Ben van Beurden said Thursday.

"We need to make sure that we are applying rigorous capital efficiency here, and we haven't always got that right," he said at an analyst presentation in London. "This means investing in the projects that generate the best returns and cash flow and getting out of plays where we can't add value for our shareholders."

The tone of spending discipline that Shell is trying to project to its investors raises questions about the company's plans for an ethane cracker, a multibillion-dollar chemical complex the company is considering building in Potter, Beaver County.

The ethane cracker would convert the natural gas liquids found in Marcellus wet gas into a feedstock for petrochemicals.

Shell has been making steady progress in Beaver County, such as buying up neighboring parcels and engaging the Pennsylvania Department of Transportation in a project to relocate and widen a road -- moves many in the community see as indications the company plans to proceed with the plant.

But as Stephen Simco, an analyst with Morningstar, noted, Shell may spend tens of millions or even hundreds of millions of dollars to evaluate a project and then reject it.

When a company as large as Shell, whose market cap is $235 billion, evaluates a project, it first sends a team to investigate it and prepare the site in the event a final investment decision to go ahead is made.

The action on the ground and the investment decision itself are two different things.

Whatever the case, Mr. Simco believes an Appalachian cracker may be "towards the bottom of their priorities."

"They've kind of screwed up everything in North America," he said. "They've basically proven they're just not competent in the shale space. What they're doing is retrenching."

Shell has consistently overpaid for shale assets and bought acreage outside of the sweet spots, he said. Its holdings in Pennsylvania include chunks in Tioga County, in the Allegheny National Forest, and in Butler and Lawrence counties.

"Some of our exploration bets have simply not worked out," Shell's CEO said.

"When we as the senior management look at the asset base today, and the new project proposals -- and there are a lot of these -- we need to be much more rigorous here," Mr. van Beurden told analysts.

"Are the outlooks, the plans and the proposals we are making really credible? Are they competitive? And are they affordable?"

Shell's management is headed to New York on Monday for another meeting with analysts.

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